How tracker mortgages turned from Jekyll to Hyde
Last week’s quarter per cent hike in ECB rates brings the average tracker mortgage from 1.15% last June to 5.15% today.
It means the cost of an average tracker has increased by €2,982 a year and €32,805 over the full mortgage term. That’s a 20% plus increase in repayments.
In the aftermath of the rate hike, ECB president Christine Lagarde left no one in any doubt that this is not over.
She said: “Are we done? Have we finished the journey? No. We’re not at our destination. Do we still have ground to cover? Yes, we still have ground to cover… It is very likely the case that we will continue to raise rates in July, which probably doesn’t come as a surprise. This is because we are determined to reach our target in a timely manner.”
Unlike other central banks, the ECB has a single mandate: price stability. That is interpreted as an inflation rate of 2% or less. Euro area annual inflation stood at 6.1% in May.
While this figure was down from 7% in April, it is not falling fast enough to satisfy the bank, which is why Ms Lagarde added: “We are not thinking about pausing, as you can tell.”
The ECB isn’t alone in pursuing a tightening course of action. The US, UK, Canadian, Australian and New Zealand central banks have all raised rates significantly over the past year.
A further hike next month now seems inevitable, and many experts anticipate a further increase in September. Rates are then expected to form a holding pattern for an extended period. Few anticipate any decline in 2024.
For years, tracker mortgages were the envy of anyone who didn’t have one, but within 12 short months, they’ve turned from Jekyll to Hyde.
If you’re suddenly paying way more than you did last year, the first thing to do is to start shopping around. Switchers can pick up substantial value in the fixed mortgage market.
According to Mark Coan of Money Sherpa, by switching to the best five-year fixed rate currently available, the average tracker mortgage holder can knock €1,103 off their yearly repayments if rates do not fall within that timeframe.
“Tracker rates are now hitting 5.15%,” he said, “but right now tracker customers can still fix on rates as low as 3.63% APRC (annual percentage rate of charge). Despite this, there are still over 130,000 tracker mortgage holders in Ireland yet to fix.
Joey Sheahan of MyMortgages.ie agrees.
“Mortgage holders must be encouraged to keep reviewing their options. Just because rates are going up doesn’t mean as a mortgage holder you cannot access cheaper rates.”
He offers the example of a tracker mortgage holder with €225,000 outstanding, and 15 years remaining. Last week’s 0.25% rise could increase your rate to 5% (4% base rate plus 1% margin) which means you will pay €1,779 per month and total interest of €95,271.
“If they looked to switch, then we could in all likelihood secure a rate of 3.6%, which would see that mortgage holder repay €1,619 per month and total interest of €66,520.”
Despite that increasing disparity between tracker and fixed mortgages, the latest Banking and Payments Federation (BPFI) report shows re-mortgage/switching activity actually fell by 63.5% in volume terms year-on-year and by 64.6% in value in the same period.
Why is that? Trevor Grant is chairperson of the Association of Irish Mortgage Advisors (AIMA). He says this steep decline is explained, in part anyway, by the fact there was a post-covid spike in switching numbers in 2022.
To address this issue, Avant Money recently introduced a three-month rate lock, allowing homeowners to switch to its One Mortgage product with a fixed rate for the entire duration of the mortgage.
“This initiative provides some certainty for customers who wish to switch and guarantees them the rate at the time of application,” says Grant
Trevor Grant: ‘We may be nearing the end of the interest rate increase cycle.’
The AIMA is now urging other lenders to provide a similar level of assurance during the switching process.
Grant also sounds a positive note in relation to future rate hikes. “We may be nearing the end of the interest rate increase cycle, which means existing mortgage holders will have a higher level of certainty regarding interest rates and potential savings.”
He adds here is an estimated €11bn held on standard variable rates with current lenders and that about €10bn in fixed-rate mortgages will expire within the next three years. The majority of these customers fixed their rates at about 2.5% to 2.8%. They need to safeguard themselves against the shock of rolling over to rates about 2% higher upon fixed rate maturity.
“We strongly encourage all applicants to seek market-based advice from a mortgage broker, as they can provide information on the wide range of options available in the market,” says Grant.
“While an applicant’s current bank may offer favourable terms, they are not obligated to inform borrowers about better terms offered by other lenders.
“For those with fixed-rate mortgages maturing within the next 12 months, it is crucial to take immediate action to ensure that the rate increase they experience upon maturity is as low as possible.”
Mortgage lenders are currently offering a range of incentives to those thinking about switching provider. Bank of Ireland, for example, will give you 2% cashback on drawdown, and a further 1% after five years “subject to meeting the conditions of the mortgage”.
EBS offer very similar terms, while AIB will pay you a lump sum of €2,000.
Switch mortgage to Permanent TSB and you’ll get 2% cashback at drawdown and a further 2% cashback on each of your monthly mortgage repayments every month until 2027 if you open an Explore account with the lender.
Haven is offering switchers €5,000 cashback where the fixed interest rate part of the mortgage is €250,000 or more and the mortgage is taken out before the end of the year.
While these offers are great, and will at the very least look after the substantial legal fees generated by switching mortgage provider, the critical variable is the interest rate. Don’t be swayed by a cashback offer if the rate isn’t the best in class.
Source: https://www.irishexaminer.com/business/economy/arid-41167843.html
