Is now the time to walk away from a tracker mortgage as ECB rates rise?

I bought a house in 2006 at the height of the madness for €320,000 in Dublin. During the property crash, I was (needless to say) very quickly in severe negative equity, with a similar property in the estate selling for as little as €56,000! At the height of it, I was paying up to €1,430 a month in mortgage repayments within the first couple of years due to higher ECB rates. Currently my monthly mortgage comes in at around €986 a month.

As an owner-occupier, I currently avail of the rent a room scheme and rent out two rooms, which brings in approximately €12,000 per annum which I contribute to the mortgage and upkeep of the house.

In checking the balance on my mortgage this week, I now owe approximately €187,000 and I have been advised that I am on a tracker mortgage. The bank adviser was reluctant to give me any more details in terms of the interest rates I currently pay over the phone.

Given my current loan to value ratio, have you any advice with regards to whether there might be better mortgage options open to me at present bearing in mind that interest rates have remained low for several years and will reportedly increase in the near future.

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Mr J.F.

For the past 15 years, tracker mortgage holders have been a protected species — a rare winner in Ireland’s banking collapse and its aftermath.

With interest rates at a set margin above European Central Bank rates, tracker mortgages ensured those who held them enjoyed some of the cheapest home loan rates in the history of Irish banking — especially as ECB rates languished below 1 per cent for the past decade.

The banks had already pulled the product from the market as they discovered they could never reliably make money from them in volatile money markets. And, as we have subsequently found out, they exerted considerable energy illicitly trying to overturn one of the few times the Irish consumer came out on top in the Irish banking market.

Even though they have not been on sale for well over a decade, tracker mortgages continue to account for around 30 per cent of the Irish mortgage market — with over €25 billion outstanding — so there are many people in your situation.

There are a couple of things to say here but first and foremost, what is your lender playing at?

They’re happy to tell you how much you owe, but not what rate of interest they are charging? That, in itself, raises all sorts of red flags.

[ An interest rate shock for borrowers is on the way ]

Banks are very careful in their dealings with customers, especially remotely. In the same way that consumers are advised never to fall for a scam by responding to texts, emails or phone calls purporting to be from their bank, banks will never assume someone ringing them as a customer is actually who they say they are.

That’s why, quite correctly, they seek various bits of information from callers to satisfy themselves they are whom they say they are.

In this case, they clearly have satisfied themselves on this subject as they have given you details of your outstanding mortgage balance — very sensitive and personal information — and reminded you that you are on a tracker rate. However, they then refused to disclose far less sensitive information — what that tracker mortgage rate is.

For you, this is naturally important information as you try to assess your options in a rising interest rate environment. Your lender wanted you to physically make an appointment to come in to see them before they would release this information.

Following our initial conversation and, on my advice, you told them to get a grip and after holding to their line on the phone call, I gather they did subsequently send you an email with your tracker margin, which is 1.25 percentage points. Why there was the need for such drama, beyond a suspicion that they wanted to try to influence you on any switching option, is a mystery. Perhaps they feared they might not be competitive if you did start looking around at options.

[ Central banks feel compelled to act decisively. Let’s hope they don’t overdo it ]

Anyone who has recently contacted a bank knows that getting appointments for in person meetings is next to impossible given the pressure of people looking to move bank from the departing Ulster Bank and KBC, so why this seemed like a good idea to them is also beyond me.

So anyway, here you are on a mortgage rate of 1.75 per cent — the 1.25 percentage point tracker margin on top of the current ECB rate of 0.5 per cent following the July increase. Rates are certain to rise again this month and over the course of the next year at least.

How high will they go? Now this is the magic question and the only honest answer is that no one knows.

The ECB had been hoping to move in quarter point increments but recent inflation and other economic data means a half point increase seems to be the minimum now expected this Thursday, with plenty of people suggesting they may even jump by three-quarters of a point. If that happened, your mortgage interest rate which would have been as low as 1.25 per cent as recently as June, would suddenly jump to 2.5 per cent. In other words, the rate would have doubled in just three months.

ECB rates have been as low as 0 per cent and as high as 4.75 per cent over the past 23 years. The market had been expecting ECB rates to settle somewhere around 2 per cent (which would mean a 3.25 per cent mortgage interest rate for you) but with core inflation — inflation which strips out the effect of price rises in energy, food, alcohol and tobacco — now comfortably ahead of the ECB target of 2 per cent and not looking like moderating yet, the suspicion has to be that they might go higher at least a for a short period.

That then raises the question of how long they might stay elevated and, again, that’s a bit of a “wait and see” issue. Essentially, until the ECB is happy it has a grip on inflation, it is not going to lower its interest rates.

So what does this mean for you?

You’re not going to switch by Thursday and the expectation is that interest rates will rise across the board with Irish lenders following the outcome of that ECB meeting. If it is any consolation, you would not have had time even if you moved late last week when you were first in touch. Any switch to a new rate would require a valuation of your property and some legal paperwork.

But you should still survey your options, and ideally take advice from a professional broker (I’m not one). As you suspect, on a mortgage that is less than 60 per cent of the value of your home — assuming it has recovered its 2006 valuation — you will be in line for more favourable rates.

If you qualify for a “green” mortgage — i.e. your home has a BER rating of B3 or higher — you can currently get a rate as low as 2 per cent, fixed for four years with Haven, which is part of AIB bank, as is EBS these days. AIB itself is offering 2.15 per cent over five years on broadly the same terms.

Leaving “green” to one side, Permanent TSB will offer 2.05 per cent for four years while Avant has a 2.25 per cent rate, also over four years.

All of these are, of course ahead of your current interest rate. What you are doing with any move is looking to “beat the market” by locking into a rate that will be lower on average over the term that you lock in for than your current tracker rate will be over the same period as ECB interest rates rise. On a loan of your size, each quarter point increase by the ECB should add around €25 to your monthly payment.

Of course, if you have a decent number of years left on your mortgage, you will also need to assess what interest rates might look like when as the current fuss dies down, and how that would compare with the rate you would enjoy if you stay with the tracker.

There are variable rates as well of course, but these are even less value at present and will also rise from those current levels as ECB rates rise.

The one thing to remember is that if you do walk away from your tracker you will not be able to return to it. So you need to think very carefully about whether it is a good idea to abandon your current arrangement.

It’s tempting of course to say that you should have done this back in the the first half of the year when very attractive rates were available even on fixed rates of 10 years or more but there is no profit in looking back and “could have beens” — and in any case I am not sure it would have been the right move for you.

Irish fixed or variable rates have never been within 1.25 percentage points of the prevailing ECB rate. Before July, the best available Irish fixed rate was 1.95 per cent with Avant for those with a loan to value of less than 60 per cent — still 0.7 of a percentage point more than you were paying — and the “average” Irish interest rates was 2.69 per cent, more than twice what you were paying.

Locking in now may or may not pay off over whatever the term of the fix is, depending on how fast and how far the ECB pushes up interest rates, but over the longer term, a 1.25 percentage point margin still looks attractive — even with a lender that plays silly buggers with its customers.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice