# Tracker mortgage holders only -its not really THAT bad for many - solution for others



## mcaul

This applies to tracker mortgage holders only.


For those on trackers, the tracker is worth approx 25% of the outstanding mortgage based on normal market bank margins. - If you were to buy that same house today and pay the exact same monthly payment, you would need to buy it at 25% lower price than you paid. (assuming a 95%-100% mortage).

In addition, the mortgage tax relief is worth approx 5% of the mortgage value. 

So combined, the tracker and soon to be gone mortgage relief is and has been worth 30% of your mortgage value since trackers were taken off the market and as long as you keep your tracker it effectively has consumed half of the estimated 50% house price decline. For those who bought before the peak, it will consume an even higher percentage.

So point one - is, if you've a tracker, you're not too badly off as it cushions 25 points of the total house price decline since you bought it. 


Point 2 is where I am seeing a potential debt write off that would have little effect for the banking sector but great result for those who need it.

For those who the house purchase is far too big a burden and they want to move into rented accomodation or start over again etc, the bank simply gives a 25% dicount on the outstanding mortgage, then the house is sold at current value and the bank arranges a medium term loan for the relatively small balance at standard mortgage rates.

EG - original house price in 2006 €380,000, current outstanding mortgage 320k, mortgage discount 80k leaving mortgage balance of 240k, house sells for 200k, leaving manageable 10 year personal loan of 40k. 

Advantages for the bank is they have already taken or priced in the hit on tracker mortgages and now have a reasonable chance of full repayment of outstanding personal loan.

Advantage for the house owner - no negative credit rating or default recorded, chance to get started again and only smallish loan to service over an agreed period. 


With the move of trackers into the IBRC, my guess is something along the above lines have already been discussed and I think its as fair a outcome for all as possible.


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## St. Bernard

I like your thinking and i really hope this is one of the options the banks offer.


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## Brendan Burgess

Hi McCaul

Very good points, which are always overlooked when people tell us about the terrible problem. I thought I had published an article on this issue but can't find it now - here is a piece I wrote 8 Suggestions for PTSB to speed up the deleveraging process. If they had implemented this and if there was takeup, they might be in a better position now. 

There are two issues facing borrowers which should not be confused - negative equity and mortgage arrears. 

There are two issues affecting lenders' profitability - cheap trackers and defaults.  I think that cheap trackers is the bigger of the two problems. 

Around 50% of home loans are on cheap trackers. Any stats on negative equity should take this into account. From an individual's point of view, the real value of their outstanding loan is a lot less due to the cheap tracker.

The government should encourage AIB,PTSB and EBS to proactively use this fact to deal with the issues. 


Offer deals to people to pay off their loans early
Offer deals to people to increase the interest rate to profitable levels
allow people in arrears to sell their homes and adjust the shortfall.
Instead, the government is messing about transferring the trackers to the IBRC. This achieves very little. 



The banks would be far better off if they converted unprofitable trackers to profitable trackers or SVRs but reduced the balance. They would take the hit up front but they would have an ongoing profitable customer who may later remortgage.


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## 44brendan

I think the main issue here for the Banks is the early recognition of losses which will in turn affect the profile of their asset book and their capital requirements. 
Unfortunately logic does not apply here. Capital adequacy is a significant issue for the Government funded Banks. The risk profile of the loan book is to some extent artifically manipulated to maintain a level that would not give rise to a requirement for further funding. The result is that it actually benefits the Bank to procrastinate on making tough decisions on doubtful debts and has the effect of "kicking the can down the road". 
There is a Pandoras Box here and to some extent I can appreciate why the lid needs to be kept on tightly!


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## Swyper

St. Bernard said:


> I like your thinking and i really hope this is one of the options the banks offer.



This 25% figure is nonsense. The actuarial value of your mortgage in relation to it's face value is a function of the time remaining on the mortgage, the interest rate being paid, and the prevailing market rate of interest.

The formula, at it's simplest (and I accept this is not perfect as it is not taking into account the value of your right to a certain margin on ECB rate, and assumes a somewhat static monthly repayment) would be something like this:


P=F*((1-(1+(i/12))^-N)/(i/12))

Mortgage Balance (F)			300,000
Monthly Payment (C)			1,600
Number of Monthly Payments (N)	240 (20 years remaining)
Market Annual Interest Rate (i)	4.00%
Market Value (P)				264,035

Discount on Face Value			12.0%


For someone with very little time left on their mortgage, or who are already paying a higher interest rate, it would be very hard to get a 25% discount.


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## Brendan Burgess

I have a more detailed discussion of the rate here: What is a fair price for paying your tracker off early?

The 25% is too high. The PTSB's broad offer of 10% seemed a bit low. 

But it does depend on a lot of factors.

The main thing is that it would be self-selecting. Those who were planning to pay their mortgage off early anyway, would take advantage of it, while those with long-term interest only mortgages shouldn't. 

But McCaul's principle is correct.

If the IBRC takes the trackers from AIB, PTSB and EBS, I would be surprised if they did so at a  12% discount. 

Brendan


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## Swyper

Brendan Burgess said:


> If the IBRC takes the trackers from AIB, PTSB and EBS, I would be surprised if they did so at a  12% discount.



My hunch would be that this is true, though the numbers I quote are for a pretty typical 2006-ish mortgage. Of course they don't include risk of default which should certainly be part of any IBRC calculation. Risk of default would increase the value of the discount.

One thing I am surprised has not happened (at least openly) is for banks to introduce offset facilities for tracker mortgages. Many tracker mortgage holders may find themselves with cash that they want to hold for a rainy day. But often, after DIRT and USC are included, the interest (even the market leading rates) they receive is less than what they would save if they put it on their mortgage. Fear of unemployment, wage cuts etc. however is discouraging them from using it to pay off the mortgage now.

If the banks were to introduce savings accounts that paid 0% (no DIRT or USC liability), but offset the savings against the mortgage when calculating interest and repayments, both parties would win. The bank would be improving its balance sheet, and reducing some of the loss-making mortgage book, while mortgagees would be reducing their tax liabilies and monthly mortgage payments while still keeping that nest egg.


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## DerKaiser

Brendan Burgess said:


> The banks would be far better off if they converted unprofitable trackers to profitable trackers or SVRs but reduced the balance. They would take the hit up front but they would have an ongoing profitable customer who may later remortgage.


 
I don't see the benefit.

By definition the payment will remain the same, all you are addressing is the negative equity rather than affordability.

A profitable customer is poor compensation for writing off 25% of the debt as:
1) you'd need to keep that customer to the end of the contract just to break even
2) You'd need more capital immediately to fund the whole thing, and capital costs money

Also, the one thing people really aren't considering is that the wholesale cost of borrowing will not necessarily remain at the levels they currently are at for 20 or 30 more years. It's very conceivable that the current crisis will end (eventually!), the ECB base rate will rise back towards 4%, deposit rates could come down and banks would then be able to access funds at or below the ecb - problem gone.

We've already seen deposit rates fall sharply of late. Last year I could have got 5% APR in several banks on deposit with an ECB +1.5% tracker running at 3%. Now the more attractive deposit rates are close to 3.5% whilst the same tracker would be 2.5%.

So with obvious evidence, the kind of discounts people were factoring in based on last years conditions should already have halved. Unsurprisingly the banks have pulled back from offering customers discounts. And frankly what goes on between PTSB & AIB in terms of offloading to IRBC at a discount is irrelevant as we are only transferring a debt from one state entity to another.


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## Firefly

This might be totally irrelevant , but can't the banks now borrow from the ECB at 1%? If this is the case, then can't they finance their tracker mortgages with this borrowing facility?


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## DerKaiser

DerKaiser said:


> ....all you are addressing is the negative equity rather than affordability.


 
...and addressing negative equity in this manner solves nothing. If someone can afford to trade up in terms of the additional repayments, they should be let take their negative equity onto the new property.  

Some of the more sensible banks are also allowing people take their tracker with them, borrowing only the additional amount at the higher SVR. 

There are sensible ways to get around negative equity constraints such as this, particularly for low interest tracker mortgage holders, whereas afforability problems are the same whether you are on a tracker or SVR and switching from one to another with a writedown is not a magic cost free solution to anything.


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## mcaul

DerKaiser said:


> ...and addressing negative equity in this manner solves nothing. If someone can afford to trade up in terms of the additional repayments, they should be let take their negative equity onto the new property.
> 
> .


 
yes - its very much addressing negative equity. Most people are well able to afford their mortage but cannot move becasue they are in negative equity and if they do move, the tracker goes. thus by moving and trying to either buy a bigger house becasue they can afford it or trying to downsize to make thing more affordable and to allow for a little more cash for everyday spending, they are penalised becasue the tracker does not move.

It would take huge leap by the government, but it really could make a gigantic difference if the simply said that in exchange for moving from trackers to SVR, they will (via the banks) simply deduct 25% off the outstanding balance of anyone with a tracker mortgage and for those who feel left out, first time buyers between 2005 & 2008 get a 10% write off on the outstanding debt with the proviso that any write off is applied to arrears first.

At that stage the market will start moving, it will free up cash, it will make hosues sell again, but most impirtantly of all it would bring HUGE confidence back to people who currently have this around their neck and could kick start the economy and retail arena (that's where my interest is!  ) very very quickly with little if any downside.

Think of it!

Positives -
People get confidence back.
Housing market become more liquid
Retail spending increases
Vat receipts increase
Jobs increase
Social welfare payments decrease
Paye tax receipts increase
Banks no longer have the track mortgage headache

Negatives
Frankly none beside a few people saying its not fair.


It won't cure all the problems, but even in a good property market there are repossessions and plenty of people who can afford to pay. Hand on heart, something as simple as this could bring everything back on track terribly easily and quickly.


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## Sunny

mcaul said:


> yes - its very much addressing negative equity. Most people are well able to afford their mortage but cannot move becasue they are in negative equity and if they do move, the tracker goes. thus by moving and trying to either buy a bigger house becasue they can afford it or trying to downsize to make thing more affordable and to allow for a little more cash for everyday spending, they are penalised becasue the tracker does not move.
> 
> It would take huge leap by the government, but it really could make a gigantic difference if the simply said that in exchange for moving from trackers to SVR, they will (via the banks) simply deduct 25% off the outstanding balance of anyone with a tracker mortgage and for those who feel left out, first time buyers between 2005 & 2008 get a 10% write off on the outstanding debt with the proviso that any write off is applied to arrears first.
> 
> At that stage the market will start moving, it will free up cash, it will make hosues sell again, but most impirtantly of all it would bring HUGE confidence back to people who currently have this around their neck and could kick start the economy and retail arena (that's where my interest is!  ) very very quickly with little if any downside.
> 
> Think of it!
> 
> Positives -
> People get confidence back.
> Housing market become more liquid
> Retail spending increases
> Vat receipts increase
> Jobs increase
> Social welfare payments decrease
> Paye tax receipts increase
> Banks no longer have the track mortgage headache
> 
> Negatives
> Frankly none beside a few people saying its not fair.
> 
> 
> It won't cure all the problems, but even in a good property market there are repossessions and plenty of people who can afford to pay. Hand on heart, something as simple as this could bring everything back on track terribly easily and quickly.


 
How will it free up cash? If I give up a cheap tracker to go onto a more expensive SVR, chances are that I am paying more every month on my mortgage despite the 25% writedown. 

Also not sure how it really helps people who bought at the peak who are in negative equity of 40-50%. Yes they are in less negative equity but they are paying more for the mortgage. 

There might be some use of your idea on a case by case basis but it's not the answer for the wider problem.


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## mcaul

Sunny said:


> How will it free up cash? If I give up a cheap tracker to go onto a more expensive SVR, chances are that I am paying more every month on my mortgage despite the 25% writedown.
> 
> Also not sure how it really helps people who bought at the peak who are in negative equity of 40-50%. Yes they are in less negative equity but they are paying more for the mortgage.
> 
> There might be some use of your idea on a case by case basis but it's not the answer for the wider problem.


 
1. A lot of people have savings and are well able to pay their mortgage - but they "feel" poor due to negative equity - the opposite effect of the boom when people felt invincible and spent like crazy cost their house was worth twice the mortgage. By reducing the negative equity to a very manageable amount or deleting it altogether, it make people feel safer from a financial point of view and they start spending again rather than saving.

2. If you got 25% off the balance of the mortage and went onto SVR, your mothly payments would be the same or reduce slightly, however, whilst for those who bought at the very top there will still be negative equity, it won't be nearly as unpayable as it currently stands. Also, on SVR, the interest rate is higher and for many people it would result in higher TRS.  

Its not a complete soluion, but its a fair one. It would be unfair picking a few here and a few there. It would be interesting to see what the cost of such a measure would be - and if its within reasonable parameters, why not have it dicussed as a serious option to get both the housing market more liquid and the economy to move up.

In reality, at some stage the banks (owned by taxpayers) will have to take a serious hit on many many mortgages.


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## Sunny

1. So you want people who aren't in negative equity to help those in negative equity to make them feel better even though they can pay their mortgage. How is that fair?
2. Have you done the maths to reach such a conclusion. The difference between my tracker and an AIB SVR is about 1.5-2%. Even taking TRS into account, I am a couple hundred down every month following your suggestion. How does that help my cash flow even if I feel richer.


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## Brendan Burgess

This is what I think will actually happen. 

AIB, PTSB and EBS will transfer their trackers to IBRC. They will do this at discount. Some will be discounted for being in arrears and/or negative equity. Performing trackers will be transferred at a discount to reflect the long-term losses. 

After the transfer, the borrowers will be offered a discount to pay them off early, in whole or in part. 

It would make more sense for these banks to offer their performing customers a repricing deal. A discount now based on a few factors - the tracker margin and the term left. 

The bank thus recognises the loss upfront. 
I would guess that the provisions which they were forced to make based on high loan to values would be reduced somewhat to compensate.
But they keep a customer who will be on a profitable rate. 
Borrowers will have a clearer view of their financial position as their loan to value will be much more accurate. 
The market statistics generally will reflect the negative equity position much better. 
Borrowers will feel better off as they have a lower loan to value. This may encourage them to spend more in the economy. 
They will be freer to sell and so there will be more market activity.

The big problem is self-selection. People who are thinking of trading up or paying down some of their mortgage would opt for this. They probably should put in a claw back in the event of redemption within 3 years.


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## thedaras

Can anyone tell what this would mean for my situation ie:
Majority of mortgage on a tracker,(12 years remaining ) the rest on SVR.
The house is worth more than the mortgage.
Will my mortgage be moved to this new bank? And would it make any difference to me? Are they offering discounts for paying off part /all of the tracker?
Thanks in advance


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## mcaul

Sunny said:


> 1. So you want people who aren't in negative equity to help those in negative equity to make them feel better even though they can pay their mortgage. How is that fair?
> 2. Have you done the maths to reach such a conclusion. The difference between my tracker and an AIB SVR is about 1.5-2%. Even taking TRS into account, I am a couple hundred down every month following your suggestion. How does that help my cash flow even if I feel richer.


 

No - The banks are losing money on trackers. I suggest that EVERY tracker is discounted so that it applies to every first time buyer who bought between 2004 - 2008 and possibly a different discount for those who traded up in the same period.
The banks are going to take a haircut on trackers anyway - possibly in region of 15%-18%, possibly more as it would also transfer bad mortgages to IBRC.

Yes, the calculations have been done by many, including eminent economists,

Example - 200,000 balance on an original 230,000 mortgage taken out in early 2007.

Current monthly payment at 1% tracker (2% interest rate) = 972 before TRS,
After 25% cut in mortgage balance (lets say its circa 200,000 after 5 years of payments ) - new balance = 150,000, remaining term = 20yrs, interest rate = 4.2% - new payment = 918 before TRS


This plan is not just for those who went over their head - I would propose it applies to every tracker mortgage in the height of the boom years with 25% being the top discount and lower discounts for periphery years.

The option is for the marlet to saty in the doldrums, for thousands more to lose thier homes, for them to move to the housing lista nd their homes sold at distressed prices to a few cash rich individuals. - No matter what, the banks and in tandem, the tax payer will lose.


Btw - I don't have a tracker and my mortgage pre-dates the boom, so this would be of no advantage to me personally, but I am in the retail trade and whilst I'm doing well, there are a lot more casualties coming down the line due to an almost freeze on spending by consumers. That means MORE job losses, more non payers, and more social welfare help needed.


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## Brendan Burgess

> Can anyone tell what this would mean for my situation ie:
> Majority of mortgage on a tracker,(12 years remaining ) the rest on SVR.



It's all speculation at the moment. Nothing at all might happen. 

They can hardly move your tracker to the IBRC and leave your SVR with PTSB. 

It would seem sensible to me that they should offer you a discount for repricing your tracker bit. 

Your repayments would be the same or maybe a bit higher.
You would owe less.
Given that it's an expensive PTSB mortgage and you have equity in your home, you might be able to remortgage to another lender, so owing less would be a great help.

But just to stress, this is only my suggestion. There is no evidence that they are planning to do this.


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## Brendan Burgess

> I would propose it applies to every tracker mortgage in the height of the boom years



Why restrict it to the boom years? 

The main factors determining the discount should be the margin and the length left on the mortgage. 

The year of issue is not relevant except that, in general,  older mortgages have less time left and so would get a lower discount.

An interest-only  mortgage with 30 years to go at 0.5% above ECB would get the biggest discount. 

A repayment mortgage with only 5 years left to go at 1.5% above ECB would hardly be worth calculating the discount. 

Brendan


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