Tracker Mortgages - Do they always lose money for the banks

mactheknife19

Was at a party over the weekend when some Johnny know it all was going on about his tracker. No doubt having a tracker most likely gives you a lower repayment rate, and we hear all the time that the are losing money for the banks. But is that are true statement for the full length of the mortgage. Surely they could never have sold a product like that. Are the losses just in the early years.
This guys plan is (he's about 10 years into a 30 year mortgage i'd say) to go to the bank ask for a discount to move to variable and then sell soon after. Antedoctally I'm hearing that banks are saying No to this anyway. Is this because they start to recoup there losses as you move through the term and ultimately the eventually go back into the black.

dotsman

The losses the banks face on trackers are a result of the credit crunch. Whenever things return to normal, tracker mortgages will return to slim profitability.

When tracker where being given to customers, the ECB rate and the "cost of funds" that the banks faced in financing the loan were very similar. As of today, the ECB rate is only 0.75%, yet that bears little impact on the "cost of funds".

Basically, with a variable rate mortgage, the bank sets the rate at a certain margin above what they paid for the money. When their costs go down, the rate goes down; when the cost goes up, the rates go up. With a tracker, the margin is fixed above the ECB rate which they have no control over.

Ultimately, the mistake the banks made in issuing trackers was twofold and are the same big reasons for the all the other issues the banks face.

• Intense competition. While muppets like to go on about the banks greed, for the most part it was simply competition combined with customer greed. Once one bank offered trackers, all banks had to off trackers. Once one bank reduced the margin, all the other banks had to reduce theirs. Ultimately, if a customer came in looking for 400,000 at ECB +0.75%, and they were able to get that from another bank, a lender had to simply say yes or no. Saying yes meant they got the business. Saying no meant they may as well shut up shop. Ultimately, the years between 2000 and 2007 were a huge battle of attrition between the banks, from which the losses were never realised until the credit crunch.
• Blind (human) optimism. During the 90's the world changed, and Ireland even more so. By the middle of the last decade, things had being going well for so long, they simply believed things would always go well, or to be more precise, that any bad events would be minor/temporary and that overall the economy would continue to remain positive. Everyone, from the tellers to the lenders to the middle management, senior management, regulator, politicians, media etc - they are all humans and herd mentality is very strong.

With regards a customer being able to get a write-down by moving from a tracker to a variable rate. It is the regulator who is forbidding this practice. However, the emphasis is on advertising it or pressurising customers etc. If you went into a bank with your homework done and the figures were realistic, then you may be able to get a write-down - but don't bank on it (pardon the pun!)