Key Post What should the lender pay you for surrendering a tracker?

[Duke of Marmalade]

Hi Duke

Even if funding was not a problem for you, how much would you pay AIB to buy my €100,000 ECB + 1% repayment mortgage with 20 years left on it?

Let's assume it has a low loan to value and good credit.

Let's strengthen the assumptions completely:

1) You are AAA and can borrow at Euribor. Short term Euribor is about 50bp above ECB which reflects that even AAA banks have some credit risk.

2. The punter is 100% creditworthy so that one can definitely expect to get paid ECB + 100bp.

On these idealised assumptions, and allowing some margin for administration, the mortgage is worth its full face value. The only issue is that the terms are guaranteed so the AAA bank can't be sure that it will always be able to borrow at Euribor.

Remember when these Trackers were sold it was not thought to be madness. The banks thought they could get Euribor funding forever and they thought the collateral security was bomb proof. For current AAA banks and for low LTVs these assumptions are still broadly true. This highlights the difficulty in coming up with a one size fits all formula.

 

[DerKaiser]

This is a very tricky subject.

Look at it from an individual's point of view.

Paying €100k off the mortgage is the equivalent of getting a guaranteed rate of ECB+1%. Do not underestimate the importance of the fact that money paid off your mortgage is 100% guaranteed to end up in your pocket. The closest thing you could compare it to is putting the money into a german bond, and I think ECB+1% compares favourably.

Look at it from a bank's point of view.

God knows!

 

[DerKaiser]

How much would you pay AIB to buy my €100,000 ECB + 1% repayment mortgage with 20 years left on it?

Let's assume it has a low loan to value and good credit.

I am guessng that you would not pay more than €75,000 for it.

If there was no default risk, I don't see why the big discount?

Irish banks might now need to charge ECB + 4%, that does not set a longer term basis upon which to value the loan repayments though.

If I was a bank that could source funds at the ECB rate or lower and could turn a profit on 1% interest rate margins, such banks still exist, I would be happy to go on a acquisition spree involving such tracker loans with no default risk at face value.

 

[marksa]

Let's strengthen the assumptions completely:

1) You are AAA and can borrow at Euribor. Short term Euribor is about 50bp above ECB which reflects that even AAA banks have some credit risk.

.... the AAA bank can't be sure that it will always be able to borrow at Euribor.

When you say short-term Euribor, you have to go to 6month Euribor before Euribor goes above 0.50 over ECB
http://www.euribor-ebf.eu/euribor-org/about-euribor.html

A "AAA" bank would in fact have only a very small portion of its borrowing coming from interbank cash market as by its nature AAA has huge amounts of surplus cash due to its safe-haven nature. Indeed, because of this, they tend to not pay up for cash as e.g. Rabo do not pay up for term deposits as is discussed in other threads on AAM. AAA banks would in general be paying well sub-Euribor for cash.

Here's a link that shows that less than 1% of Rabo's funding is <1 year in maturity - unlilke the bankrupt Irish banks where probably >30% is less than 2weeks (ECB repo)!
[broken link removed]

Yes, AAA banks have some credit risk, but a very tiny amount as mentioned above they do not generally hold much risky debt/lending on their books to lose capital on. This is also why there are so very few AAA banks, and even these days why there are so few AA1 banks as banks have to hold vast amounts of capital to maintain regulatory capital levels and meet ratings agency hurdles. Unlike in the past, where any tin-pot securitisation vehicle was given AAA. Now ratings agencies are much more cautious to give out that coveted rating.

 

[Duke of Marmalade]

We have details of the PTSB offer in today's Sindo. Basically if you pay off say 1K extra a month of your Tracker Mortgage they will top up that repayment by 5%. Thus in very simple terms you are getting 5% upfront plus ECB+1% all net of tax of course on your extra repayments.

Now that is a good deal though a far cry from them paying you, quite the reverse.

Interesting question - why don't they offer everybody a stand alone regular savings plan with 105% allocation and a guaranteed return of ECB+1%? This would have the same economic effect as offering the repayment deal to those who actually do have Trackers. There would have to be some concept of a clawback of the extra allocation upon early withdrawal.

 

[Brendan Burgess]

why don't they offer everybody a stand alone regular savings plan with 105% allocation and a guaranteed return of ECB+1%?

It would only be similar if the person was guaranteeing to deposit for 20 years.