# Should banks be forced to offer only tracker or fixed rates for mortgages?



## callybags (28 Jul 2010)

Hope this is in the right forum. Please move if not.

It seems recently that there has been a disproportionate amount of complaints from various sources ( and in my opinion mainly justified) regarding banks and their SVR for mortgages.

There does not appear to be any control over increases. Although I do agree that the banks have to make a profit on their mortgage book.

Would it be a good idea for the Financial Regulator to say to the banks: "Fron now on all new and existing mortgage rates must be linked to the ECB rate."

There could be a spread set which gives the bank a reasonable margin (example between 2% and 4% above ECB ).

This would give borrowers more security knowing the banks cannot raise rates at a whim, and would keep a certain amount of competion between the banks offering mortgages.

The figures I have given are purely examples to illustrate the point.


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## PaddyW (29 Jul 2010)

I can envisage ECB +15% as the lowest rate


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## rustbucket (30 Jul 2010)

I think its a good idea

Stupid question though- maybe someone can explain.

How can banks be losing money on Tracker mortgages? Do they not borrow from other banks/ECB at fixed rates when they are giving the customer a mortgage?

If not,why not? Is it a possibility? If they give someone a tracker of 2% over ECB rate how can they lose money on it? Its still 2% over the ECB rate whenever it moves up or down.Are there other costs to the bank?


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## Sunny (30 Jul 2010)

rustbucket said:


> I think its a good idea
> 
> Stupid question though- maybe someone can explain.
> 
> ...


 
Because banks don't borrow at the ECB rate. The ECB is a "risk free" rate but when banks lend and borrow to each other, they add a risk premium which is what Euribor is. It's an indication of the cost of funding for the banks. In the good years, this wasn't a problem as Euribor tracked the ECB but when the financial crisis struck, banks were having to pay more to borrow money but were stuck receiving the ECB rate which was falling on trackers. 

There are other complicating factors such as how banks manage their interest rate risk on their loan books but that's the simple answer.


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## rustbucket (30 Jul 2010)

Sunny said:


> Because banks don't borrow at the ECB rate. The ECB is a "risk free" rate but when banks lend and borrow to each other, they add a risk premium which is what Euribor is. It's an indication of the cost of funding for the banks. In the good years, this wasn't a problem as Euribor tracked the ECB but when the financial crisis struck, banks were having to pay more to borrow money but were stuck receiving the ECB rate which was falling on trackers.
> 
> There are other complicating factors such as how banks manage their interest rate risk on their loan books but that's the simple answer.


 
Thanks Sunny- So is the Euribor rate made up by the banks when lending to each other? Is it possible for them to borrow from the ECB?

It would just seem to be simpler as they would borrow of ECB and then track it to customer at an agreed rate as Callybags suggested. Thereby removing the 'risk premium' of interbank lending of Euribor? (maybe I have it all wrong)


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## NorfBank (30 Jul 2010)

Just to put what Sunny said into simple figures - 3 month Euribor was around 5.3% in October 2008, ECB rate was 3.75% so NIB on their ECB + 0.5% tracker were borrowing money at around 5.3% and lending it at 4.25%.

Bank do not just borrow money to finance mortgages, there are many other factors but the above is just to give an idea of why the FR will never force the banks to lend at ECB + a margin. 

There is a more chance of banks introducing 3m EURIBOR + a margin but this would be hard to administer as EURIBOR changes much more frequently than the ECB rate.


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## Mrs Vimes (30 Jul 2010)

My understanding is that in EU countries (other than here and UK) tracker mortgages tend to track the Euribor rather than ECB rate.  It is no harder to administer than SVR as it is only updated (by bank, not market) every month or so.  In the UK a lot of the trackers which track the central bank rate were only for the first couple of years and then reverted to SVR.
Sybil


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## WinWin (2 Aug 2010)

It would be much better if they offered full term mortgage rates, at least if the rate was 5% or 7%, you would know what your repayments will be till you finish paying, and it would add a lot of stability to the property market (would have during the bubble and will in the future).


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