# Tracker Good! SVR Bad! Banks should be compelled to offer Trackers.



## ajapale

Over the last decade or so the virtues of tracker mortgages over the bank preferred SVR's have often been repeated.

Over the last few months most if not all banks have discontinued offering a tracker.

Since the banks are now being supported by the tax payer I have a simple proposal.

The government should compel the banks to offer a tracker mortgage. The banks can decide/compete on the margin offered and the product can be based around ECB or any other index rate (Libor, EuBor?) they desire.

What do AAMers think of this suggestion?


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## Bank Manager

Banks would have to price off the actual cost to borrow on the markets - given both Ireland's and Irish bank's current standings - both are paying a premium above european counterparts - therefore I think it would not provide the borrower with the attarctive rate that I think is the basis of your proposal - in essence forcing banks to offer a tracker that doesn't provide value doesn't seem that logical to me ...

Regards,

BM


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## ajapale

Bank Manager said:


> .... I think it would not provide the borrower with the attractive rate that I think is the basis of your proposal ....



No, Im not taking about offering an attractive rate (per se) but a _transparent_ rate based on a fixed margin which would allow the consumer choose from among competing banks the one offering the best margin.

As it is with the srv the banks can jack up the rate on a whim and it is impossible to compare rates when they can arbitrarily change at some time into the future.


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## Bank Manager

But that's exactly my point  - if, the markets continue to take a negative view of Ireland and indeed continue to increase the rate at which they lend to Ireland/banks - then this cost will be passed on to the end consumer.  In addition these changes tend to take place more frequently than say an ECB change, so it could lead to mulitiple and frequent changes to the borrowers rate.  Also I'm not sure I agree with your assertion that the SVR can be jacked up on a whim - as far as I'm aware we have no experience of this situation, with all major banks passing on ECB changes as they arise (and I think despite the myriad of rates that exist for all forms of personal and business borrowing, this is the one rate that the media/Government will always focus on).

I can see the attractiveness of your proposal when the only variable in the make up of the rate is the bank's margin, but my view is in the current environment there are now two varying variables (sorry not great English).  No bank will price their tracker off ECB as it no longer represents the actual cost of funding their mortgage book and ultimately to price off the actual cost of borrowing I think may expose the end customer to even greater uncertainty...

just my view....

Regards,

BM


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## Brendan Burgess

Banks have lost a lot of money by offering tracker mortgages. 

In a free market, they should not be forced to offer products which would be very risky for them.

I would argue, that now the taxpayer owns them, they should be forbidden from offering trackers. It is not in the taxpayers' interest for the banks to lose money.

For the same reason, the banks should not be allowed to let people out of fixed rates without paying penalties. 

brendan


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## ajapale

Brendan said:


> Banks have lost a lot of money by offering tracker mortgages.



I suggest that banks have lost money by offering tracker mortgages at too tight a margin (and perhaps tracking the wrong index).

I still maintain that trackers are better from the consumer point of view as they are fully transparent. Consumers could choose from the banks offering the best margin.



Brendan said:


> In a free market, they should not be forced to offer products which would be very risky for them.



In a free market banks should be compelled (under consumer protection law) to offer products which are transparent. They should price the risk correctly. Im not suggesting that they offer cheap trackers only that they offer trackers with the appropriate risk premium and compete in the open market place on that basis.



Brendan said:


> I would argue, that now the taxpayer owns them, they should be forbidden from offering trackers. It is not in the taxpayers' interest for the banks to lose money.



OK, I agree that this is a diversion. But if this is the case then the government have no business insisting on a foreclosure moratorium as they have.



Brendan said:


> For the same reason, the banks should not be allowed to let people out of fixed rates without paying penalties.



I agree. But the penalties must be very clearly defined at the outset and must not be arbitrary as we have seen in the not too distant past.

Out of interest are tracker mortgages still being offered in other juristictions such as Australia, NZ and UK?


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## Brendan Burgess

> I still maintain that trackers are better from the consumer point of view as they are fully transparent. Consumers could choose from the banks offering the best margin.



I agree that a cheap tracker is better from the consumer point of view. 

We should focus on making it even easier to switch mortgages, so that if your  bank does not pass on the interest rate cut, then you can switch to another bank. 



> But if this is the case then the government have no business insisting on a foreclosure moratorium as they have.



The government had no business in insisting on this. It's a sop to the masses. It has no practical implications for most lenders who adhered voluntarily to the IBF Code of Practice on Mortgage Arrears. It makes business tougher for the sub-prime lenders, but it means that they will probably do less sub-prime lending as a result.

It is probably bad for consumers as some will definitely just defer taking any action for a year. It ha


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## jhegarty

ajapale said:


> The government should compel the banks to offer a tracker mortgage. The banks can decide/compete on the margin offered and the product




So the bank just offers ECB + 10% , problem solved.


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## ajapale

jhegarty said:


> So the bank just offers ECB + 10% , problem solved.



Yep!

Bank A offers ECB + 10% and let Bank B offer ECB + 3% and then the market will find its level.

With srv's its ECB + X%, where x is unknown!


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## z109

So far as I know, SVRs are priced off 3 month euribor. So they are already trackers as such. The banks didn't increase them when euribor spiked hugely last year and lost a fair amount of money on them. But part of the problem, is that the banks are borrowing short to lend long. And they are doing this for a fair proportion of their borrowing. This is not a sustainable model - ask Northern Rock...

What Ireland should be doing is moving to a continental model of long-term fixed rates with matching covered bonds issued - borrowing long-term and lending long-term on fixed rates. Of course, with long-term rates about 5%, this would be hugely more expensive than current rates, so the chances of it happening are low...


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## newirishman

When I found out that banks in Ireland offer tracker mortgages on ECB base rate down to +.75% my first thought was: No way the banks can survive on this margin.
Usually (meaning: in countries with a normal, healthy property market), mortgages are tracked on the 6 mth Euribor, with well beyond 1.5% margin (As far as I can see, this is roughly what the banks doing now with the normal SVR mortgages) - or, as yoganmahew mentioned, long term (5, 10, 15 yrs) fixed rates. Everything else is not a business and the Central Bank should not have allowed this to happen. Certainly, the government should not step in now and do the same stupid thing again. What's they point of fuelling another propoerty bubble with cheap credit when rates are low anyway?


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## andyyy74

newirishman said:


> What's they point of fuelling another propoerty bubble with cheap credit when rates are low anyway?



Exacly! Why not better learning from countries where there was no property bubble (Swiss, Austria, Germany).

The mortgage conditions in these contries are mostly:

- Just offering fixed mortgage rates with 5-15 year terms. The bank is refinancing this with long term bonds and the houseowner has caclulable payments for a long term. Banks will not have refinancing problems again.

- Maximum mortgage terms of 20-25 years and no "interst only mortgages" option.

- Lending of max. 70%- 30% deposit needed. That means people have to  save significant amount of money before purchasing a house. People will buy property rather in their 30ies and not directly after their college exam. Negative equity is very unlikely.

- Max. lending of 3-4 times yearly income.

The implementation of these criterias would lead to a more sustainable property market in Ireland with moderate house prices and less speculation. 
Tracker rates would just repeat the same mistakes already made. You cant just fight fire with fire.


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## LDFerguson

It would be possible for banks to offer a Euribor tracker mortgage and indeed it has been done.  The mortgage rate would be Euribor + X%.  As Euribor rates fluctuate frequently, the mortgage could contain a clause that the rate only alters every quarter.  While such a mortgage would be transparent, the occasional spikes in the Euribor rate would be very hard for the customer to stomach.


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## ajapale

In the light of the decision of TSB to increase their SVR I thought it might be interesting to refloat this discussion from last May.

To restate my opinion banks should be compelled through consumer leglislation to offer tracker rates (not cheap rates! just simply rates which tracks a rate).

It is interesting to note that in the early days of AAM the superiority of trackers over SVR's for consumers was regularly discussed.


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## Protocol

The UK had trackers with as low as 0.19% fixed margins:

[broken link removed]

*Woolwich offers lifetime tracker mortgage at base rate +0.19% *

Monday, 21, Aug 2006 01:58

Woolwich has re-launched its lifetime tracker mortgage fixed at 0.19 per cent above Bank of England base rate. 
Currently charging 4.94 per cent, the Woolwich mortgage has no arrangement or redemption fees. 
People moving to this mortgage from another lender can use Woolwich Switch & Save package, offering no valuation or legal costs. 
The Woolwich lifetime tracker mortgage offers the ability to overpay, underpay and payment holidays, and is available to all existing and new customers; with no fees to pay. 
The Woolwich lifetime tracker is available for loans up to 80 per cent of the value of the property (LTV), with a minimum loan size of £50,000.


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## Protocol

The Woolwich bank have a current offer of a 2.13% margin tracker over the Barclays base rate of 0.5% = 2.63% currently.


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## Brendan Burgess

ajapale said:


> In the light of the decision of TSB to increase their SVR I thought it might be interesting to refloat this discussion from last May.
> 
> To restate my opinion banks should be compelled through consumer leglislation to offer tracker rates (not cheap rates! just simply rates which tracks a rate).
> 
> It is interesting to note that in the early days of AAM the superiority of trackers over SVR's for consumers was regularly discussed.



Hi AJ

The banks/taxpayers should not be forced to offer any products. They would still have to price them way above the Standard Variable Rate that they would not be attractive. 

If there is to be any increase in regulation, it would be for the FR to insist that the banks up the mortgage rate to make their products profitable again. 

It made no sense for the banks to be lending at .5% above ECB rate when they were paying more than this to attract deposits. Perhaps the FR should have stepped in then. 

Brendan


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## Towger

[FONT=&quot]The way I look at it is that Joe Public had almost 10 years to change their existing mortgage’s into trackers. There were even banks paying towards the legal costs. It is their own bad judgement that they did not, just as it is the Irish Banks for using the ECB rate for their trackers while I believe most/all European banks who offered similar products based them on the Euribor rate.[/FONT]


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## ajapale

Brendan said:


> The banks/taxpayers should not be forced to offer any products.


 I think there should be as much price transparency for the consumer as possible. 



Brendan said:


> They would still have to price them way above the Standard Variable Rate that they would not be attractive.



Agreed, but in a properly working competitive market the consumer would be free to choose between the various competing  _transparent_ offerings in the market.



Brendan said:


> If there is to be any increase in regulation, it would be for the FR to insist that the banks up the mortgage rate to make their products profitable again.


 Yes, in some regulated markets (Electricity for instance) the regulator has a role in price setting. 




Brendan said:


> It made no sense for the banks to be lending at .5% above ECB rate when they were paying more than this to attract deposits. Perhaps the FR should have stepped in then.


 It made no sense ...but they did it. This is not the fault of transparent tracker pricing but rather that fact that they offered the tracker at too low a margin.

I suppose what I'm trying to articulate here is inherent unfairness of the SVR system in which the financial institutions can arbitrarily and unilaterally increase their margin at a whim. When the consumer buys a SVR mortgage he is getting a "pig in a poke".



Towger said:


> [FONT=&quot]The way I look at it is that Joe Public had almost 10 years to change their existing mortgage’s into trackers. [/FONT]



I'm proposing that banks be required to offer transparent tracker rates for new contracts going forward. In much the same way that the are required to facilitate switching at present.


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## pjmn

AJ,

There is merit in your suggestion that bank's offer a 'tracker' - tracked against something, but you are missing one fundamental point - i.e. there is no longer a mechanism to set as the base - money markets are lending to different banks at differents rates at different times, based on the lenders percieved risk of that entity, hence it will be impossible to to agree a standard above which individual banks will set their margin...

... and if you force them to use a certain base, you expose them to exactly the same thing they got caught with in terms of tracker rates over ECB.

Methinks the liklihood of new 'trackers' being sold are virtually nil.


pjmn


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## Brendan Burgess

Towger said:


> [FONT=&quot]The way I look at it is that Joe Public had almost 10 years to change their existing mortgage’s into trackers. There were even banks paying towards the legal costs. It is their own bad judgement that they did not, just as it is the Irish Banks for using the ECB rate for their trackers while I believe most/all European banks who offered similar products based them on the Euribor rate.[/FONT]



Not really. Lots of Joes took out fixed rate mortgages assuming that they could shop around when the fixed rate period ended. They had not anticipated this particular problem that the market would have gone from feast to famine.


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## ajapale

Hi pjnm,

And thanks for the interesting observation. do you know on what basis trackers are offered in other jurisdictions notably in the UK (but also Australia and NZ)? Does this cause commercial difficulties for lending institutions in those places?

aj


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## Brendan Burgess

AJ

Usually, the market is competitive and people can switch to another lender if their existing lender puts up the rate beyond the market level.

We are in an artificial market situation at the moment. If I don't like the rate being charged by permanent tsb, I probably can't do anything about it, if I fall into any of the following categories:


Negative Equity or high loan to value
high loan to salary (or no salary)
Arrears
Bad credit record
Even if I don't fall into the above categories, I might not be able to change as the other banks are not too active either. 

One of my main issues with the Irish Nationwide was that they did not pass on interest rate cuts to their customers. Those who noticed this asked for a reduction and got one as they could have moved. 

Those in arrears, got no reduction as the IN knew that they could do nothing about it. 

It _might _be worth considering making sure that the other banks don't do this. But you could argue that someone in arrears was a higher risk and should pay more. 

Brendan


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## newirishman

Question is tracker on what - ECB rate? Doesn't make sense.
Most foreigns banks I know do their mortgages on EURIBOR trackers, which reflects actually better their costs.


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## Robin Banks

ajapale said:


> do you know on what basis trackers are offered in other jurisdictions notably in the UK (but also Australia and NZ)?


 
I can tell you there are no tracker mortgages in Australia, and there never has been one offered in the last 10 years. It's either SVR or fixed. The big four all increased their margin over the RBA base rate during the gfc to compensate for higher funding costs. The RBA rate is currently 3.75% and vast majority of residential mortgages on SVR are currently between 6.0 and 6.75%, so mortgages are 2.25% - 3.00% over base.

There is one product offered by bankwest called a tracker but it bears no relation whatsoever to the tracker mortgages sold in Ireland because
- its reference rate is the average SVR of the big four banks
- it's only a 2 year intro gimmick
http://www.bankwest.com.au/Personal/Home_Loans/Home_Loan_Products/Bankwest_Rate_Tracker/index.aspx

I can also tell you that the Australian banking system is extremely healthy, well capitalised and highly profitable, unlike the Irish. The stock market and the property market are both doing quite well too.

Far from being a good thing, I think the trackers offered by Irish banks during the property bubble were a symptom of the total madness which prevailed at the time.


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## deeheg

I was one of those people who " didnt know what a tracker meant" and had a broker not explaining so missed out on that, but if they seem too good to be true, you can be sure we wont get it again!


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## Joe Nonety

deeheg said:


> I was one of those people who " didnt know what a tracker meant" and had a broker not explaining so missed out on that, but if they seem too good to be true, you can be sure we wont get it again!


 
Some of the brokers have a lot to answer for. One of them also convinced my sister to go with a variable rate instead of a tracker. No doubt they got higher commission for variable rate customers they bring in.


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## Sherman

Surely the problem with the Irish/British mortgage market is the crazy situation where banks are allowed to lend long-term but fund that lending by borrowing very short-term. We should aim to introduce mortgage products like those available on the Continent and in the US such as 15-25 year fixed mortgages. The banks should then be forced to match their funding durations to the durations of those loans.


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## NorfBank

Joe Nonety said:


> Some of the brokers have a lot to answer for. One of them also convinced my sister to go with a variable rate instead of a tracker. No doubt they got higher commission for variable rate customers they bring in.



That may have been poor advice depending on the circumstances but the broker would not have gotten higher commission because your sister chose a variable rate. If he put her with a bank that was offering him higher commission than he would have earned elsewhere then there may be a problem.

Your sister would have/should have received a reasons why/letter of suitability outlining why the broker advised the variable rate over the tracker rate. If he/she did not give her best advice then her first port of call is a complaint to the broker and then the Financial Services Ombudsman if she is not satisfied with the response.

[broken link removed]


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## NorfBank

Sherman said:


> Surely the problem with the Irish/British mortgage market is the crazy situation where banks are allowed to lend long-term but fund that lending by borrowing very short-term. We should aim to introduce mortgage products like those available on the Continent and in the US such as 15-25 year fixed mortgages. The banks should then be forced to match their funding durations to the durations of those loans.



This could happen soon but the problem is that the longest term government bond that the lender has to benchmark it's mortgage rates against has been 10 years hence a maximum of 10 year fixed rates. A 15 year bond was issued last year and a 30 year government bond is being talked about.

There is a 30 year treasury bill in the US so they can offer the longer dated fixed rates.

[broken link removed]


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## corkgal

Terrible idea, I want the banks to make as much profit as possible now I'm a shareholder!


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