What is a variable mortgage rate?

firiesclose

I have a variable mortgage with Bank of Ireland, who decides what this rate is? Is it the Bank themselves? The last 2 recent lowering of the ECB has not made any difference to me. I thought this rate would go up and down. It went up in September this year. I understand that a tracker rate has to change with the ECB.If it is the bank that decides the rate then I think anyone that has a mortgage should be ringing, emailing, tweeting their banks and putting the pressure on to lower the rate. Also, there was a whisper of the government bringing in a law to stop banks putting rates up but this has not been inforced. I rang my local bank and they said they were not aware of this law being addressed. Has anyone else heard about this potential law. If it is being looked at then we should all be contacting our local TD's and government to bring this law into pracitce.

Whats the point of being on a variable rate if the only change is the rate going up?

donalg1

firiesclose wrote: »

I have a variable mortgage with Bank of Ireland, who decides what this rate is? Is it the Bank themselves? The last 2 recent lowering of the ECB has not made any difference to me. I thought this rate would go up and down. It went up in September this year. I understand that a tracker rate has to change with the ECB.If it is the bank that decides the rate then I think anyone that has a mortgage should be ringing, emailing, tweeting their banks and putting the pressure on to lower the rate. Also, there was a whisper of the government bringing in a law to stop banks putting rates up but this has not been inforced. I rang my local bank and they said they were not aware of this law being addressed. Has anyone else heard about this potential law. If it is being looked at then we should all be contacting our local TD's and government to bring this law into pracitce.

Whats the point of being on a variable rate if the only change is the rate going up?

I am no expert but the understanding of it I have is, when the ECB rate changes the Banks rate usually changes also. I think does could have something to do with the Banks borrowing from the ECB and lending to you, so the ECB charge the bank 2% interest on their borrowing and then the bank charges you 2.5% interest on your mortgage, so if the ECB changes the interest rate to 2.5% then the bank will change theirs to 3% and vice versa if it goes down, but the bank will be the ones responsible for changing their own rate and is up to them if they wish to pass on a decrease by the ECB.

Could be totally wrong on the above though.

RichardAnd

A variable mortgage is, I believe, a loan that is repaid at an interest rate that varies depending on the lenders own ability to borrow on the markets. In theory, they can go up or down but considering the state of things, the ability of lenders to access credit is confounded thus, rates will rise.

seamus

RichardAnd wrote: »

A variable mortgage is, I believe, a loan that is repaid at an interest rate that varies depending on the lenders own ability to borrow on the markets. In theory, they can go up or down but considering the state of things, the ability of lenders to access credit is confounded thus, rates will rise.

That's pretty much it.

The ECB (European Central Bank) is exactly what it says on the tin. But at the end of the day it's just another very big bank. Most banks don't borrow money directly from the ECB, instead they go to money markets and borrow their money from those markets. These work in pretty much the same way as your mortgage - the bank takes the money and agrees to repay a certain % of interest on that money.

So the variable interest rate which banks charge on variable interest rate mortgages reflect the total cost (to the bank) of borrowing the money to give you a loan, plus a little bit of profit for the bank. This interest rate has no real relationship to the ECB rate, however the ECB rate has in historic times tended to have an effect on money markets - as the ECB rate went down, the cost of money on money markets dropped and so variable holders were given a break.

That link is somewhat weakened in recent times as the money markets are tending more to provide money based on the security of the individual bank rather than overall trends. So in the case of Irish banks who represent quite a large risk, they will have to pay a higher rate to borrow from the markets. So even though the ECB rate drops, this may have no effect on what BOI & AIB are paying on your mortgage and so they have no reason to pass on a rate cut to their variable holders.

nukin_futs

Mortgages:

Fixed rate - you pay the advertised rate for the numer of years as offered, e.g. 5% for 5 years. After this you have the option to fix again for another period of time, or to exit to a variable/tracker rate. All the details will have been made clear at the time of taking out the mortgage. Useful at a time where you believe interest rates may rise. Also you know exactly how much your repayments will be for the first number of years;

Tracker - the interest rate you pay is linked (tracks) the ECB rate, e.g. ECB rate +1%. So any changes in the ECB rate are subsequently reflected in your repyments (ECB rate goes down, repayments go down). Good if you believe that ECB may lower rates, or hold them the same, exceptionally good value nowadays if you managed to get one in recent years;

Variable - Similar to tracker (a tracker is a special type of variable rate mortgage), in that your rate can rise and fall according to interest rates. AFAIK these are usually based on the inter-bank borrowing rates, i.e. the rate the bank pays when it borrows money. This is not necessarily the same as the ECB rate. The terms will state that the rate you pay is X interest rate +0.5%, for example. Again, good if you believe that rates may fall in the future. Falling ECB rates may not result in a reduction in variable rate repayments.
More information

The moral and social discussion about state-funded banks not passing ECB rate reductions to variable rate holders is another topic which I won't get into.

waitingforBB

Variable rates (other than trackers) dont state that they are x% above any rate. They are entirely at the discretion of the lender..
The lender may pass on any ECB rate increases / decreases or they may not. The lender is not obliged legally to pass on any rate change from the ECB. The only mortgage that legally has to pass on rate variations from ECB are trackers (and they will say that they are x% above ECB).

While there has been some governmental pressure (rightly or wrongly) for institutions to pass on the recent ECB rate cuts as we can see, some banks have decided not to do so (AIB passed on November cut but will not pass on December cut, BOI didnt pass on November cut and will pass on some of the December cut).

The elephant in the room is not the passing on of rates, its the actual rates paid by customers not protected by trackers. PTSB passed on both the recent rate decreased from the ECB, but they had increases rates far and above ECB rate movements since 2007.

---

ECB rate PTSB AIB
June 2007 4% 5.44% 5.2%
Dec 2011 1% 5.19% 3%
Drop 3% 0.25% 2.2%



The ECB rate has fallen by 3%
AIB has passed on 2.2%
But PTSB has passed on only 0.25%

So PTSB should pass on a further 2% now to catch up with AIB


Thats what variable rates are all about..

nesf

Moved from Irish Economy.

firiesclose

Thanks guys. I am at the mercy so of Bank of Ireland to do as they please about the rate. I have totally misunderstood what variable meant. I thought the ECB had a part to play in the variable rate. Lets hope the government will bring in a law to stop banks putting they rate up as they please.....