More lenders plan to phase out tracker mortgages (S B Post)

04 November 2011

Several of the country’s main mortgage lenders will this week follow AIB in discouraging customers from taking out tracker mortgages by making them more expensive than traditional variable-rate home loans.
AIB became the first lender to begin phasing out tracker mortgages last week, with a substantial hike in rates applying to new mortgage business.
The bank’s tracker mortgage rate will increase to 5.5 per cent, 1.5 per cent over the ECB rate, for new customers taking out loans worth more than 80 per cent of the value of their home.
This will be 0.25 per cent higher than the 5.25 per cent rate applying to the bank’s standard variable rate (SVR) mortgage. Banking sources said a number of other banks would revise their pricing arrangements in the coming days and weeks, with substantial increases in tracker mortgage margins in the pipeline.
As a result of the changes, more borrowers are expected to opt for SVR mortgages, with their relatively lower rates. While banks will continue to offer tracker mortgage products, they will build in wider margins and make them less attractive than SVR products.
The wider margins come in response to the credit crunch, which has increased the cost of borrowing money in the interbank market, even though ECB rates have been frozen for almost a year.
Tracker mortgage contracts prevent banks from passing on these increased funding costs to existing tracker customers, resulting in much of this business becoming loss-making for banks.
Banking sources told The Sunday Business Post that new customers who wanted their borrowing rate to track the ECB rate would soon be expected to pay a significant premium over standard rates for this facility.
Lenders favour SVR mortgages, as they are not contractually bound to change their lending rates in line with changes in the ECB rate. This offers them scope to increase profits by not passing on the full extent of a rate cut, or by increasing the lending rate by more than changes in the ECB rate.