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Dan White: Why you may soon have to say goodbye to that low-cost tracker mortgage

On Sunday we were told that we would have to immediately pump another €10bn of fresh capital into our banks, with a further €25bn being required as a contingency.

This would cover any as yet undiscovered losses, most likely residential mortgages where the official statistics published by the Central Bank, which put the figure at 4pc, massively under-stated the true level of arrears.

Following on from Sunday's announcement, it is now clear that the Government's "final" figure of €50bn for fixing the banking system, which was published at the end of September, will be comfortably exceeded.

I still see no reason to doubt ratings agency Standard & Poor's estimate that the ultimate cost will be €90bn.

Burning

With the ECB refusing to countenance any burning of senior bank bondholders, the cost will fall on the Irish taxpayer.

Unless Ireland does the sensible thing and defaults, he or she, their children and grandchildren, will still be paying the bill for Ireland's reckless bankers well into the second half of the 21st century.

But for homeowners, most of whom are also taxpayers, that's only the beginning of their misery.

After being kept at the record low level of 1pc for more than two years, the monetary masochists who populate the ECB's decision-making council are almost certain to increase official eurozone interest rates some time next year.

This will immediately hit the approximately 20pc of Irish mortgage borrowers, almost 160,000, whose loans are on variable interest rates.

While the 25pc of mortgage borrowers, almost 200,000, on fixed-rate deals and the 55pc, almost 440,000, on trackers, won't be immediately affected by any interest rate increase, any respite is likely to be no more than temporary.

Unlike in the United States or mainland Europe, where you can borrow fixed-rate money at reasonable interest rates for up to 30 years, most Irish fixed-rate mortgages are for relatively short periods of time, usually no more than five years.

This means that, if rates stay high for any length of time, fixed-rate borrowers will also quickly start paying more as their current deals expire.

And what about tracker mortgages? These loans, where the interest rate is capped at a certain margin, usually 0.75pc, over official ECB rates make up over half of all outstanding Irish mortgages.

With ECB rates at record lows, these borrowers have been enjoying extremely low interest rates.



rickety

The only problem is that, with overseas banks no longer prepared to lend to the rickety Irish banks at anything like official ECB rates, the Irish banks are now losing an absolute fortune on tracker mortgages. This of course drives up the cost to the taxpayer of bailing out the banks.

The bad news for homeowners with a tracker mortgage is that something has got to give.

Fixing the Irish banking system will almost certainly mean allowing the banks to extricate themselves from tracker mortgages. This would effectively transfer some of the cost of rescuing the banks from taxpayers as a whole to individual homeowners with tracker mortgages.

Add it all up and the pressure on hard-pressed homeowners will increase even further.

But at least Anglo Irish, Seanie FitzPatrick's rotten bank, is finally set to disappear with that nice man from the Central Bank, Professor Honohan, assuring us that its name will be gone forever from our streets early in the new year.

While no-one will mourn Anglo's passing, it's not quite that simple. While the name will disappear its liabilities certainly won't.

Back in September Brian Lenihan put the cost of sorting out the Anglo mess at up to €34bn, while S&P reckoned that the eventual cost would leave us with little change out of €40bn.

With the Government proposing to pay for the debacle through a series of post-dated IOUs over the next 15 years, Anglo will be gone but certainly not forgotten.


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