# Are lenders losing money on trackers



## Codogly (21 Jan 2019)

Does the global withdrawal of QE mean rising rates ( inter bank rates ) and consequently widening of the losses banks are making in Tracker Mortgages ...perhaps incentifying bank to discount trackers to clear their loss make portfolios ?


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## RedOnion (21 Jan 2019)

Codogly said:


> Does the global withdrawal of QE mean rising rates ( inter bank rates ) and consequently widening of the losses banks are making in Tracker Mortgages ...perhaps incentifying bank to discount trackers to clear their loss make portfolios ?


Not really. It would actually help them.
Although overnight interbank rates are deeply negative, the banks can't actually borrow at that rate. Mainly because they've too many deposits, and excess cash that they have to place at negative rates with other banks.
An uptick in interest rates, while keeping their customer deposit rates at or near zero, would help the banks. But when ECB rates rise is when they start making more money.

BTW, a performing tracker mortgage is not loss making.


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## NoRegretsCoyote (22 Jan 2019)

RedOnion said:


> BTW, a performing tracker mortgage is not loss making.



Maybe not in a pure cash sense as interbank rates are so low at the moment.

From the bank's perspective it has an asset of a tracker at 0.8% with 20 years remaining. But could it raise 20-year funding at 0.8% or less right now? I doubt it. 

Obviously a bank's liabilities will be a mix of short and long-term. But is any Irish bank's weighted cost of funding below 0.8%?


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## RedOnion (22 Jan 2019)

NoRegretsCoyote said:


> From the bank's perspective it has an asset of a tracker at 0.8% with 20 years remaining. But could it raise 20-year funding at 0.8% or less right now? I doubt it.


You have absolutely no idea what you are talking about.
You're talking about a fixed margin Vs fixed rate.


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## NoRegretsCoyote (22 Jan 2019)

RedOnion said:


> You have absolutely no idea what you are talking about.
> You're talking about a fixed margin Vs fixed rate.



Well if that's the case please educate me

My point is that the interest on a fully-performing tracker is unlikely to exceed the average cost of funding for the bank.

My assumption would be that profitability at least means income on a product exceeds the cost of funding it.

What am I missing?


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## Brendan Burgess (22 Jan 2019)

NoRegretsCoyote said:


> From the bank's perspective it has an asset of a tracker at 0.8% with 20 years remaining. But could it raise 20-year funding at 0.8% or less right now? I doubt it.



The bank does not have to raise funding fixed at 0.8% for 20 years. 

The interest rate on the tracker is variable. When ECB rates rise to 3%, they will receive a return of 3.8% on their mortgage loans. 

The bank can raise money at far less than 0.8% now which is why they are profitable.   If someone pays off their mortgage early, AIB will not be able to get as good a return elsewhere. 

Brendan


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## cremeegg (22 Jan 2019)

NoRegretsCoyote said:


> From the bank's perspective it has an asset of a tracker at 0.8% with 20 years remaining. But could it raise 20-year funding at 0.8% or less right now? I doubt it.



Ah yes, the old question of how the banks fund their lending. This was discussed extensively here some time ago



RedOnion said:


> You have absolutely no idea what you are talking about.
> You're talking about a fixed margin Vs fixed rate.



Charming!



NoRegretsCoyote said:


> Well if that's the case please educate me



Not many of the bankers on here previously seemed to be able to explain how the banks were funded. RedOnion was not involved in that discussion to my recollection.


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## Sarenco (22 Jan 2019)

NoRegretsCoyote said:


> My point is that the interest on a fully-performing tracker is unlikely to exceed the average cost of funding for the bank.


The myth that will not die…

BOI's cost of funds (primarily deposits) is currently around 0.4%, whereas the average rate on their tracker mortgage book is around 1.09% - that's a margin of 0.69%.

The banks' tracker books are profitable – there's no doubt about it.


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## RedOnion (22 Jan 2019)

cremeegg said:


> Charming!


I have my days, but not my finest post.



NoRegretsCoyote said:


> My point is that the interest on a fully-performing tracker is unlikely to exceed the average cost of funding for the bank.


Once ECB + the margin exceeds the cost of funds, then it's contributing to net interest income.


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## NoRegretsCoyote (22 Jan 2019)

Sarenco said:


> BOI's cost of funds (primarily deposits) is currently around 0.4%, whereas the average rate on their tracker mortgage book is around 1.09% - that's a margin of 0.69%.
> .



Thanks @Sarenco for clarifying. I wasn't aware that their cost of funds had sunk so low. No one else was able to respond with concrete numbers.



A slightly different point is that profitability on the tracker book can only be sustained if you make the assumption that Irish banks will always be able to access unlimited funds at interbank rates. We know in the past that this hasn't always been the case.


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## RedOnion (22 Jan 2019)

NoRegretsCoyote said:


> A slightly different point is that profitability on the tracker book can only be sustained if you make the assumption that Irish banks will always be able to access unlimited funds at interbank rates. We know in the past that this hasn't always been the case.


Yes, but that's where it gets complicated.

The banks are able to fund a lot of their mortgage books using covered bonds. They are issued by reference to EURIBOR, or at a fixed rate but swapped back to EURIBOR using derivatives. So they have guaranteed borrowing tracking EURIBOR for the term of the bond.

There is of course a risk of a difference between EURIBOR and ECB.


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## Brendan Burgess (23 Jan 2019)

NoRegretsCoyote said:


> No one else was able to respond with concrete numbers.



The fact that no one bothered pointed the obvious out to you does not mean that they were not able to. 

You made an incorrect statement about long term fixed rates and that is what was corrected and clarified. 

The lenders' very low cost of funds is so well know, that I did not think it was worth repeating e.g. 

https://www.askaboutmoney.com/threa...ment-of-tracker-mortgage.202892/#post-1508903


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## ashambles (23 Jan 2019)

If the BOI cost of funding is 0.4% and the average tracker is 1.09%, then some trackers will be loss making.

The gross margin they're currently looking for in countries like the Netherlands is 1.5%.
[broken link removed]

Does anyone really think an Irish bank like BOI is better run than our continental counterparts and can somehow live on a margin of 0.7% on average for trackers?

Some of these trackers (usually the biggest ones) are around 0.5%, i.e. a gross margin of 0.1% generating 100 euro per year per 100k of mortgage.

The bank has costs to run a mortgage business (staff costs, regulator fees, office rental, advertising, computer systems, deed storage etc..)

I'd guess that all 0.5 -> 1% Irish trackers are loss making.


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## RedOnion (23 Jan 2019)

ashambles said:


> The gross margin they're currently looking for in countries like the Netherlands is 1.5%.


That's a blended rate across all their products.
By the same measure, Irish Banks are achieving a NIM over 2%. 
You can get a 10 year fixed mortgage in Netherlands for 1.75%. there's no way they have a margin of 1.5% built into that.



ashambles said:


> Some of these trackers (usually the biggest ones) are around 0.5%,


There are very few trackers on a margin this low.

Banks could outsource the entire management of mortgage portfolios, in a similar way to the funds that are buying them. It costs about 0.3% for this (depending on credit grade).

In summary, all tracker mortgages are contributing to Net Interest Income.
That NII is in almost all cases more than enough to cover costs of managing the mortgage.
Whether or not it's 'profitable' depends on impairment.


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## Sarenco (23 Jan 2019)

ashambles said:


> The gross margin they're currently looking for in countries like the Netherlands is 1.5%.


The gross margin on new mortgage loans (i.e. what that article is actually referencing) being achieved by Irish lenders is a heck of a lot more than 1.5%! 


ashambles said:


> I'd guess that all 0.5 -> 1% Irish trackers are loss making.


Well, your guess would be wrong.  The performing tracker mortgage books of Irish lenders are not generating losses.


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## Codogly (23 Jan 2019)

Thanks for all the insights provided above ... I guess my question was trying to gauge if the bank would ever be tempted to discount low margin trackers in the future if funds got tight ( more expensive ) ....im of those fortunate to have a tracker at ECB + 0.5 and I have deliberately held off overpaying.  I have moved deposits around 5 regular saver accounts maximizing the net of DIRT return , currently the net of dirt weighted average return across the 5 accounts is 0.74 and that's allowing for recent declines in the interest rate.  The plan is to simply wait and watch the ECB ... I figure as long as im make more than mortgage is costing me then why change.
20 years left on mortgage ... zero tolerance for risk and very worried about over providing for pension ( could well work against you in the future - solution to the pension timebomb issue ... means test the state pension, political suicide but by them they will have no choice ).  Sorry going somewhat off topic at the end.

Thanks again


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## NoRegretsCoyote (23 Jan 2019)

In fairness @RedOnion 's claim was that all _performing _trackers are profitable.

Having seen the responses, I think that's a fair claim.


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## WizardDr (25 Jan 2019)

One thing that is overlooked (forgive me if I missed it) is that Banks have 'free balances'
These are positive current account balances that aggregate to billions and have been remarkably stable and growing and cost ZERO.
How do you allocate these liabilities to lending assets? and er Trackers in particular?
Therefore how can anyone conclude that all trackers were loss makers when at least some of the allocation had to be tracker etc


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