FOR YEARS WE have been told “never give up your tracker” and this used to be good advice, but a flurry of recent rate hikes by the European Central Bank has turned the maths of tracker mortgages upside down.
If ECB rates stay where they are, repayments on an average tracker could tot up to €24,500 more over a 15-year term.
If the quarter of a million people with trackers in this country act now, they can still avoid up to 40% of these increases by fixing, but given how good things were for so long for people on trackers, and how quickly rates have gone up in the last eight months, many simply do not realise they need to act.
A tracker mortgage is a mortgage that follows or ‘tracks’ the ECB base rate. These mortgages were introduced by banks in the Celtic Tiger years in an attempt to cash in on the Irish housing boom.
Depending on the lender and when you signed up, rates ranged from 2.5% above the ECB base rate down to as low as 0.5% above the rate. After the financial crash of 2008 ECB interest rates plummeted to 0%, which made tracker mortgages very attractive for consumers and loss-making for the banks.
As a result, Irish banks withdrew all tracker mortgages from the market and infamously attempted to move a number of customers off tracker mortgages to try to reduce their losses. This is known as the ‘tracker mortgage scandal’ resulting in customers losing homes and millions of euros in both costs and fines levied on the Irish banks.
As Central Banks around the world attempted to bring the economy back to life after the crash, rates stayed low and interest rates stayed at rock bottom for over a decade. If you were on a tracker this meant you had hit the jackpot, with some paying as little as 0.5% for their mortgage. This is why the fella down the pub would tell you, “never give up your tracker”.
When inflation started to rear its ugly head again in early 2022 the spell was finally broken. With Central Banks pulling on the interest rate handbrake hard to stop inflation from careering out of control.
The ECB hiked the rate it lends to retail banks from 0% in June last year to 3.0% now and has already confirmed that the rate will go to a hefty 3.5% in March. This means the average tracker rate of ECB rate +1.15% has gone from an interest rate of 1.15% in June last year to 4.65% this March, increasing monthly repayments on the average tracker mortgage by a whopping €136 a month.
Unfortunately, there is scarce relief in store for hard-pressed tracker customers, not only may rates rise further, they may not come down for some time and are unlikely to ever come down to the rates seen post-2008.
Most commentators agree that an ECB rate of around 3% is likely to stick around for the foreseeable and reductions after that are much more likely to land it at the 2% mark rather than at the 0% era rates.
The good news though is that there is still time for tracker mortgage holders to reduce their exposure to these increases. The average outstanding tracker mortgage is just over €81,322 according to Central Bank figures. By switching this amount to the best fixed rate on the market the average tracker mortgage holder on +1.15% will save over €10,000 over a 15-year term if rates stay put. Even customers on some of the lowest margin trackers of +0.75% will save over €7,800 by fixing at the best rate.
Obviously, every tracker customer has a different outstanding amount, term and rate, so to make things easy we built a free tracker mortgage savings calculator for tracker customers.
Of course, you could just stick with your tracker and hope the rates come back down. For some people, for example, those with smaller outstanding amounts and terms, or those with enough disposable income that they can afford to make that gamble, this might make sense.
However, in my opinion, the overwhelming majority of people should be considering fixing. The big risk is that by the time mortgage holders realise this the low fixed rate deals currently available will be gone, as the ECB rate increases will also push these deals up over time.
Of course, if you’re considering a move to fixed, you must also calculate your ability to pay what will most certainly be higher monthly repayments.
If you’re a tracker customer you now need to do two things. Firstly, get your fixed rate offer letter from your current lender. Then, take that letter to a mortgage broker to get advice. A mortgage broker is qualified to advise you if you should stick with your tracker, take up your fixed rate offer or fix with another lender for the best rate.
There are also two big reasons to get advice rather than trying to do it all yourself. For one, you can check out how much you can save by switching instead of fixing with your current lender, the most expensive lenders have the most tracker customers so a typical customer will pay more than €6,000 more by fixing with the lender they are with. Secondly, remember once your tracker is gone it’s gone, there is no going back. So despite all the benefits it’s still a major decision to fix and might not suit everyone. An advisor can talk you through all the pros and cons so you can make an informed decision.
Finally, don’t just listen to the guy in the pub who says “never give up your tracker”, he was right once and he might even still be right depending on your circumstances, but if he isn’t, it could cost you a fortune. So don’t just sit there, get advice from someone who actually knows what they are talking about.
Mark Coan is a financial expert and founder of online money guide moneysherpa.ie.
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