# Lack of Zero Floor on Tracker Mortgages About to be Tested



## Lightning (30 Jun 2019)

There is speculation that the ECB might cut the refinance rate from 0.00% to -0.10% on 25 July or later this year. 

This should mean that a 70 bps tracker drops to 0.60% unless there was a zero floor clause in the tracker contract. 

Davy have told the Sunday Times: 
"Our understanding from engagement with the domestic banks is that loan documentation does not include any zero floor on the reference rate itself,” but if rates were to drop further "all the main banks told Davy it was unlikely that they could end up having to pay interest on tracker mortgages if rates fell far enough" but they could not offer "absolute assurance" on this. 

So will banks drop tracker rates if the refinance rate goes negative? Seems that yes they will but only up to the point that the mortgage rate itself hits zero.


----------



## NoRegretsCoyote (30 Jun 2019)

I doubt anyone thought back in 2004 that negative rates were in the possible universe of outcomes.


----------



## elacsaplau (30 Jun 2019)

NoRegretsCoyote said:


> I doubt anyone thought back in 2004 that negative rates were in the possible universe of outcomes.



I understand where you are coming from but...…....the academic debate on negative interest rates goes back well over a hundred years - with Silvio Gesell being generally recognised as its first proponent.

I'd argue that the possibility of negative interest rates was foreseeable back in 2004! Very simply, Euro interest rates were then at 2% and Japan was already at 0% and there was debate at that time whether Japan could go negative!

If you think about it, the then long-term trajectory of interest rates in developed economies had been one of interest rate reductions. Consider, for example, what rates would have been in 1994 and 1984 - so surely a reasonable question to have asked then (i.e. in 2004) is whether this trend could continue and how far it could go?!

In general, I am struck by how often people confuse improbable with impossible! I agree with you that this would not have been on the radar of most customers / mortgage brokers / commentators at that time but weird stuff happens all the time!!


----------



## NoRegretsCoyote (30 Jun 2019)

@elacsaplau 

Of course you are right. My point is that _Irish bankers_ likely didn't consider it probably enough to put into mortgage contracts.


----------



## Codogly (15 Jul 2019)

Wouldn't it be crazy if we ended up in a situation where a bank were paying interest to a customer on a Loan owed to that bank...and the customer was declaring interest income from their mortgage on their tax return.


----------



## Protocol (15 Jul 2019)

If the ECB do cut rates, then may cut the deposit rate, not the main refi rate.

That would mean no effects on Irish tracker mortgages.


----------



## Protocol (15 Jul 2019)

Even if they do cut the main re-financing rate below 0%, it would require a cut of 0.50% to leave some (not many) Irish mortgages at 0%.

The lowest margin tracker were NIB 50% LTV trackers at ECB + 0.50%,


----------



## Lightning (15 Jul 2019)

Danske believe that the rate cut should be 0.20% rather than 0.10%.


----------



## Codogly (16 Jul 2019)

Hi Protocol,
It would appear that the ECB are in fact considering a cut to the re-financing rate ( media reports ) ... not sure why but that’s what’s been reported.
Even a -.10 cut will eat into low bank margins...and it means the unthinkable is moving towards possible.
Ciarán T ... why would Danske be looking for a larger cut to the Re-financing rate ???


----------



## Lightning (16 Jul 2019)

I suspect that 20 bps is what Danske think the ECB need to do to help meet ECB inflation targets.


----------



## Codogly (16 Jul 2019)

At what stage would the mortgage lender consider offering discounts on the loan outstanding ...like you said the original NIB Trackers were 50bp + ECB ...hard to say I know it depends on the future expectation of rates but I’d love to see even for a few months were the banks were paying interest to some customers


----------



## derwalsh (16 Jul 2019)

If this goes ahead do people think there is a possibility of banks offering deals to customer to  pay off part or all their mortgage?


----------



## Bizzybee (16 Jul 2019)

If this goes ahead, would Pepper Group who have taken over Danske Bank Mortgages be obliged to pass on the rate cut?  They are still not producing statements despite requests so it is a guessing game as to whether or not they are applying the correct interest rate as it is.


----------



## peemac (16 Jul 2019)

Bizzybee said:


> If this goes ahead, would Pepper Group who have taken over Danske Bank Mortgages be obliged to pass on the rate cut?  They are still not producing statements despite requests so it is a guessing game as to whether or not they are applying the correct interest rate as it is.


If its a tracker, then there is simply no option for them but to apply the rate depicted in the contract. And if you don't have your mortgage contract, you could ask your solicitor who handled the purchase for a copy.


----------



## cremeegg (16 Jul 2019)

I have the champagne on ice.


----------



## Baby boomer (19 Jul 2019)

Looking forward to this!  Tracker of ecb+1% on investment property with PTSB.  They wrote to me a few years ago offering a ten per cent (if i remember correctly) "bonus" on any lump sum repayment.  Funds were tight so I didn't avail of it.  Wonder if they'll up their offer??


----------



## AnyAdvice (21 Jul 2019)

I'm trying to calculate how much BOI are losing on my tracker mortgage (ECB + 1.1%). Received the 35 year loan in March 2008. Euro 271k loan. Euro 200k outstanding. Current house value approx Euro 225k. I've leased it for 10 years.

If I was able to calculate that the bank stands to lose ~$40k (example) over the next 10 years assuming ECB rates stay below 1%, I'd propose for a ~$25k discount if I repay in a lump sum. 

Thoughts on how to model this calculation.


----------



## Protocol (21 Jul 2019)

A 1.1% tracker margin is profitable.


----------



## Codogly (21 Jul 2019)

I guess the question here is , “ at what point would any bank start thinking about offering discounts haircuts to off load performing yet loss making trackers “ ? ... so if we use the example of the lowest know trackers around ( old NIB / Danske trackers - ECB + 0.50 ) that st what stage would the ECB Refinance rate need to get to ?... -.10 , -.20 , -.30 ???pr indeed all the way -.60 etc


----------



## NoRegretsCoyote (22 Jul 2019)

AnyAdvice said:


> I'm trying to calculate how much BOI are losing on my tracker mortgage (ECB + 1.1%). Received the 35 year loan in March 2008. Euro 271k loan. Euro 200k outstanding. Current house value approx Euro 225k. I've leased it for 10 years.
> 
> If I was able to calculate that the bank stands to lose ~$40k (example) over the next 10 years assuming ECB rates stay below 1%, I'd propose for a ~$25k discount if I repay in a lump sum.
> 
> Thoughts on how to model this calculation.



As you can see by looking here, Bank of Ireland is raising deposits at a rate below what you pay on your tracker.


----------



## Brendan Burgess (22 Jul 2019)

AnyAdvice said:


> I'm trying to calculate how much BOI are losing on my tracker mortgage (ECB + 1.1%).



If you pay off your mortgage, BoI will then put the proceeds on deposit with the ECB at ECB rate.  So they will not be encouraging you to do this. 

ptsb gave a 10% bonus to people who paid down their mortgages at a time when they were reliant on ECB funding to keep going.  It is the very opposite now.

If you repay a tracker at ECB + 1.1% and your bank can lend it on at 4.5%, they would be delighted to see you repaying your tracker. But that is not the position they are in.

Brendan


----------



## peemac (22 Jul 2019)

AnyAdvice said:


> I'm trying to calculate how much BOI are losing on my tracker mortgage (ECB + 1.1%). Received the 35 year loan in March 2008. Euro 271k loan. Euro 200k outstanding. Current house value approx Euro 225k. I've leased it for 10 years.
> 
> If I was able to calculate that the bank stands to lose ~$40k (example) over the next 10 years assuming ECB rates stay below 1%, I'd propose for a ~$25k discount if I repay in a lump sum.
> 
> Thoughts on how to model this calculation.


For about 8-12 months at the height of the banking crisis around 2010/2011 banks here were considered risky and they had to pay a premium to borrow from the market. 

The media gloated about this in hysterical headlines for several months.

Ecb then threw billions at the financial markets and banks including Irish banks lapped it up and borrowing rates tumbled. 

As news that banks were no longer losing money on trackers does not make a hysterical headline, it was left with people thinking that banks continued to lose on trackers.

It's estimated that servicing a good mortgage costs a bank less than 0.5%, so with the exception of about 12 months they have and will continue to make a small profit on your mortgage.


----------



## Baby boomer (25 Jul 2019)

Brendan Burgess said:


> ptsb gave a 10% bonus to people who paid down their mortgages at a time when they were reliant on ECB funding to keep going.  It is the very opposite now.
> 
> Brendan



Ah, so there's pretty much zero chance they'll better (or repeat) that offer.  Pity!  I'd quite enjoy extracting a bonus from them now.


----------

