Brendan Burgess
Founder
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The main complaint about the Ombudsman's decision was the failure to give people trackers for the remaining term of the mortgage.
I am trying to work out what this has cost a borrower in terms of today's money.
Mortgage balance today: €100,000
Remaining term: 20 years
AIB variable rate <80%: 2.95%
Tracker rate you should be on: 1.5%
The repayments on €100k @ 1.5% over 20 years would be €480 a month
The repayments on €87k @2.95% over 20 years would also be €480 a month.
So the most it's worth is 13% of the balance on your mortgage today.
But let's say you fix with KBC instead at 2.2%
The repayments on €93,000 @ 2.2% would be €480 a month, so this makes a tracker worth only 7% of the current balance.
Put this another way
If the Ombudsman had ordered AIB to give someone back a tracker at 1.5% and AIB offered to write down the mortgage by 10% instead, the borrower should grab the offer.
The remaining term is a big factor in calculating the discount
The shorter the remaining term, the lower the value of a tracker. Clearly a tracker with 20 years left is worth more than a tracker with 2 years left.
If you trade up, you are effectively shortening the term, as you lose your tracker.
And most people reduce the original term either by trading up, paying lump sums off the mortgage, or just increasing their monthly repayments.
The guaranteed margin of 1.5% is worth something
The ECB rate could remain constant and Irish banks could increase their mortgage rates anyway, in which case the guaranteed margin of 1.5% would be more valuable.
But assuming an ECB rate of zero for a few years, Irish mortgage rates, especially for low LTV mortgages, should fall. For example, it is expected that Avantmoney will be introducing 2% mortgages to Ireland in the near future which would reduce the value of a 1.5% tracker to 5% of the mortgage value.
I am trying to work out what this has cost a borrower in terms of today's money.
Mortgage balance today: €100,000
Remaining term: 20 years
AIB variable rate <80%: 2.95%
Tracker rate you should be on: 1.5%
The repayments on €100k @ 1.5% over 20 years would be €480 a month
The repayments on €87k @2.95% over 20 years would also be €480 a month.
So the most it's worth is 13% of the balance on your mortgage today.
But let's say you fix with KBC instead at 2.2%
The repayments on €93,000 @ 2.2% would be €480 a month, so this makes a tracker worth only 7% of the current balance.
Put this another way
If the Ombudsman had ordered AIB to give someone back a tracker at 1.5% and AIB offered to write down the mortgage by 10% instead, the borrower should grab the offer.
The remaining term is a big factor in calculating the discount
The shorter the remaining term, the lower the value of a tracker. Clearly a tracker with 20 years left is worth more than a tracker with 2 years left.
If you trade up, you are effectively shortening the term, as you lose your tracker.
And most people reduce the original term either by trading up, paying lump sums off the mortgage, or just increasing their monthly repayments.
The guaranteed margin of 1.5% is worth something
The ECB rate could remain constant and Irish banks could increase their mortgage rates anyway, in which case the guaranteed margin of 1.5% would be more valuable.
But assuming an ECB rate of zero for a few years, Irish mortgage rates, especially for low LTV mortgages, should fall. For example, it is expected that Avantmoney will be introducing 2% mortgages to Ireland in the near future which would reduce the value of a 1.5% tracker to 5% of the mortgage value.
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