You would be crackers to give up your trackers. That was the headline on a comment piece by this journalist in this newspaper in April, 2010.
hat advice has served people well.
But is it still good advice, or has the time come for some tracker mortgage holders to think the unthinkable and ditch their trackers?
Maybe the situation has changed so much that some tracker holders might be better off opting for a fixed rate. Heresy, I hear you say.
The original advice from the comment piece of 12 years ago has served tracker mortgage holders well.
It was written just after Bank of Scotland and its retail offshoot Halifax had decided to pull out of this market. That bank had introduced tracker mortgages to the market.
The tracker trick seemed to work a treat. The Scottish bank snapped up lots of business as savvy Irish consumers realised trackers are great value.
With trackers, banks can only raise the interest rate when the European Central Bank (ECB) moves its refinancing rate.
And the rate you pay on a tracker is a set percentage above the ECB rate.
This is called the margin and it varies quite a bit. Some people are on margins of just 0.5pc. As the ECB refinancing rate is 0pc this means the interest on the mortgages is just 0.5pc.
Typically, the margin is around 1pc, with others on much higher margins.
Trackers turned into a financial disaster for the banks. So the banks ended up proving to be crackers for giving us trackers.
This is because a situation evolved that the banks had not anticipated – the cost of wholesale money (which they were using to fund mortgages) diverged from the ECB rate during the financial crash. Not only that, trackers were mispriced by banks in another way. The lenders had subsidised unsustainably low tracker interest rates to build up market share.
This situation prompted the underhand and immoral moves by the banks to trick people off the tracker rates – something first exposed by this journalist in this newspaper in 2009.
Years later when the Central Bank finally acknowledged what had happened it forced the banks to restore trackers to more than 40,000 homeowners, refund them overpaid interest and pay compensation. The tracker mortgage scandal has cost the banks here €1.5bn.
No wonder banks wanted us off trackers. The last few years have been good, really good, for those with trackers.
ECB governors have held their refinancing rate at 0pc for the last six years. This means tracker mortgage holders have made a financial killing.
There is a joke that asks how do you know when someone has a tracker? They will tell you, is the answer, so happy with themselves are they.
All this means we have long and painful history when it comes to the tracker mortgage – something which is now as much part of Irish lore as Tayto crisps.
But is it time we ended our relationship with our beloved trackers? That time might have arrived for some tracker mortgage holders, illogical though it seems.
Despite the best efforts of banks in the past to trick people out of their trackers, some tracker holders might be wise to consider voluntarily ditching them.
Why? Because interest rates are set to start climbing, and climbing fast over the next few months.
From 0pc, they could be 1pc or 1.5pc by the end of the year. Some economists reckon the ECB’s main rate will then be 2.5pc by the end of next year.
This will make some trackers expensive, reversing the situation we have had for the last few years.
But be warned: this advice only applies to those with expensive trackers.
In other words, ONLY if your tracker is set at a margin of more than 1.5pc over the ECB rate should you even consider giving up your tracker.
That is the key point. Stick with the tracker if your margin is 0.5pc, or 1pc, or 1.25pc. It will be good value for a good while.
High-margin trackers are set to become expensive. If the ECB rate was to hit 2pc, someone on tracker with a margin of 1.5pc would be paying a rate of 3.5pc.
The reason it might be a good idea to consider dropping the tracker is that fixed rates are now cheap in this market, cheaper than they have ever been. This is despite two step rate-rise announcements from ICS Mortgages, and a planned rise from Avant Money.
But fixed rates as low as 1.95pc are still on offer for those with low loan to value (LTV). Even if you have an LTV as high as 90pc you still can get a 10-year fixed rate of 2.7pc.
A key factor is the LTV ratio you have, and how many years you have left to pay. Many took out trackers more than a decade ago, so their LTVs are low.
But if they have just five to 10 years left, it makes sense to stick with the tracker.
Remember too that swapping a tracker for a fixed rate may remove flexibility to overpay your mortgage.
The key is to take good professional advice. Get a good broker to review the situation. As they are heavily regulated they will not advise you to do something that is not in your interests.
And remember too that you are unlikely to get your tracker back if you give it up.
