How come the lenders are losing money on trackers?

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callybags

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I would have thought it's blindingly obvious that tracker mortgages are being subsidised by SVR ones. That's more a statement of fact than a perception.

For the bank to return to profitability it must make an overall margin on it's loans. This is dictated by it's cost of funds and the rates it charges. Unfortunately it doesn't have any choice with trackers.
 
callybags said:
I would have thought it's blindingly obvious that tracker mortgages are being subsidised by SVR ones. That's more a statement of fact than a perception.

.
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It's not at all that clear cut.

Bank of Ireland is not losing money on trackers because their cost of funds is 1.15%

The other banks are not losing much.

Brendan
 
Brendan Burgess said:
It's not at all that clear cut.

Bank of Ireland is not losing money on trackers because their cost of funds is 1.15%

The other banks are not losing much.

Brendan
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I don't think we can simply say trackers are not 'loss making' because the funding costs are in line with the tracker rates. The loans need to bear their share of operating costs/loan losses also.
A shop that sells products at the same price as the wholesaler can say they are not making any losses on the sales but they're not doing anything that would keep them in business!
 
Brendan Burgess said:
It's not at all that clear cut.

Bank of Ireland is not losing money on trackers because their cost of funds is 1.15%

The other banks are not losing much.

Brendan
Click to expand...

As rob oyle has said, it's not about trackers losing money.

It's about maintaining an overall margin to ensure profitability.

A bit like loss leaders, but break-even leaders, if you will.
 
SVR,s are not subsidising Trackers.
This continues to be a neat way to let Banks off the hook on the (thieving) rates they are applying to SVR mortgages.

Brendan has it in one
{lenders are using the SVRs to make exceptional profits- because they can}
 
From an accounting point of view, they most certainly are subsidising trackers.

It doesn't mean trackers are loss making, just not as profitable.

If a supermarket sells milk at break-even, and sells cans of Coke at a 40% mark-up, then the sales of Coke are subsidising the milk.
 
I wonder will people who have personal loans or credit card debt start complaining that they are being required to pay excessive interest rates to subsidise SVR mortgages? To be honest, I find the whole idea that one bank product is somehow subsidising another bank product somewhat bizarre.

I also don't think it's true to say that the Irish banks are making excessive profits at the moment - they actually look pretty slim to me (and non-existent in the case of PTSB). Also, their respective NIMs (which are a key indicator of profitability for banks) are pretty low by international standards.

I think it is pretty obvious that the reason the cost of credit in Ireland (including, but not limited to, the cost of variable mortgages) is so high is almost entirely down to the level of non-performing loans on the banks' books. If we want a lower cost of credit, we have to insist that the NPLs are dealt with more aggressively. I appreciate that this is an unpalatable truth for many, but there it is...
 
so-crates said:
What is more insidious in my mind is blaming tracker mortgages. They are not the reason for the high SVR rates. They are the excuse. The get-out-of-jail-card for the banks in our national game of monopoly
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To be fair, I don't think bankers are citing trackers as the reason for high SVR rates. They are all citing their relatively high cost of funds, which is largely due their weak balance sheets. It's all about the NPLs...
 
callybags said:
From an accounting point of view, they most certainly are subsidising trackers.

It doesn't mean trackers are loss making, just not as profitable.

If a supermarket sells milk at break-even, and sells cans of Coke at a 40% mark-up, then the sales of Coke are subsidising the milk.
Click to expand...

callybags

How can banks possibly be using a product (tracker mortgages) that they no longer offer as a loss leader? The fact that banks may have offered loans on more favourable terms in the past is really not relevant to the position today.
 
Sarenco said:
callybags

How can banks possibly be using a product (tracker mortgages) that they no longer offer as a loss leader? The fact that banks may have offered loans on more favourable terms in the past is really not relevant to the position today.
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I suppose "subsidising" is probably the wrong term to use.

Going back to what I said earlier, if a bank wants, or needs to achieve a particular margin on it's cost of funds, then it stands to reason that it will charge more on it's SVR loans than it would have to if it did not have trackers on it's books.
 
callybags said:
From an accounting point of view, they most certainly are subsidising trackers.

It doesn't mean trackers are loss making, just not as profitable.

If a supermarket sells milk at break-even, and sells cans of Coke at a 40% mark-up, then the sales of Coke are subsidising the milk.
Click to expand...
.....................

We are not dealing with accountancy!

Boo-hoo for the poor Banks in that Trackers are not as profitable ?

From an accountancy view , if customers accept the 40% as a fair mark-up = no problem . However if customers clearly understand that every time the Coke costs supermarket less then the customer gets the benefit of a reduction down to that 40% mark up.

eg coke costs supermarket 1 euro they charge 1.40 .
eg coke costs supermarket 50 cents they charge .70 cents.

In short supermarket does not still charge 1.40.

Still means Supermarket gets their 40%

Basic sums methinks!
 
callybags said:
Going back to what I said earlier, if a bank wants, or needs to achieve a particular margin on it's cost of funds, then it stands to reason that it will charge more on it's SVR loans than it would have to if it did not have trackers on it's books.
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That's certainly true but more to the point if the banks hadn't written so many imprudent loans in the past their cost of funds would now be much lower and the cost of credit wouldn't be so high. Unfortunately, however, time travel is not available to us as a possible solution. There are certainly steps that could be taken to expedite the resolution of the NPLs in order to drive down the cost of credit but they are problematic from a political or societal perspective.
 
While the SRV rates are resulting in high profits in absolute terms you would surely expect that given the risks associated with mortgage lending in Ireland.

It would be more interesting to see the risk adjusted profitability of the business - if it was good I'm sure we would have some other banks looking for a piece of that action.

The SRVs are a sunk cost effectively - not loss making in the direct sense but maybe not sufficient to cover their proportion of the expense base. When you factor in the losses from those unable/unwilling to pay their mortgage they probably are loss making although this has been provided for in their bad debt provisions I guess.
 
The end of the eligible liabilities guarantee scheme in March 2013 and the re entry of Irish Banks into the bond market later that year have helped to normalise banking. You are indeed correct to say that there has been a dynamic and rapid move away from monetary funding support but these support mechanisms will not disappear until summer of 2015. Then Irish Banks will have to function unaided within the money markets.
Look at BOI results in 2008 and 2009, do these results correlate with what the true financial state of the bank actually was ? I think not.

Ciaran T what is your view of the banks increasing svr mortage rates when the actual cost of funding is decreasing ?
 
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Fin Crusader said:
You are indeed correct to say that there has been a dynamic and rapid move away from monetary funding support but these support mechanisms will not disappear completely until summer of 2015
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There is no chance whatsoever that monetary authority financing will disappear in Summer 2015. Multiple banks would collapse if that happened.

Fin Crusader said:
Ciaran T what is your view of the banks increasing svr mortage rates when the actual cost of funding is decreasing ?
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The significant decrease in deposit rates not been matched, in the main, by mortgage rate decreases is a very difficult pill to swallow.

That said, at least the recent trend in mortgage rates has been moderately downward. Most rates have at the very least plateaued.

Only competitive and / or political / media pressure will ensure the trend continues downward.
 
Sorry Ciaran T, typo in last post, should have read summer 2019. In relation to political pressure to reduce these rates I do not think this can be achieved easily. You see, the government, is both poacher and gamekeeper. They want both BOI and in particular AIB to rebuild their balance sheets, so that when the Government sells its stake in both banks they will realise a return.
I believe that Brendan Burgess's campaign to make Joe Public aware of this scandalous situation is laudable. I would like to take this opportunity to ask all readers affected by this issue to email their local representatives in the Dail to a least voice their disapproval.

Many thanks

fin Crusader
 
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CiaranT said:
There is no chance whatsoever that monetary authority financing will disappear in Summer 2015. Multiple banks would collapse if that happened.



The significant decrease in deposit rates not been matched, in the main, by mortgage rate decreases is a very difficult pill to swallow.

That said, at least the recent trend in mortgage rates has been moderately downward. Most rates have at the very least plateaued.

Only competitive and / or political / media pressure will ensure the trend continues downward.
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I find the musings on Banks Cost of Funds/profitability etc very interesting .
I find most of said musings irrelevant.
Poor Joe Soap on Standard Variable Rate (SVR) is still being screwed!
 
Touche, and to rub salt into open wounds the banks are reducing svr mortgages but only to new business customers, the cost of funds is the cost funds whether you are a new customer or not. Could this not be treated as discrimination against certain bank borrowers down the Courts. Is it not discrimination in the supply of goods and services to certain individuals.
 
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As noted on another thread, the Central Bank recently reported that based on deposit rates at the end of 2014, that banks' margin on trackers was in excess of 0.5%.

We know that deposit rates continued to fall during the first quarter of this year so hopefully it is now absolutely clear that our banks are not making losses on trackers.
 
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