Tracker mortgages - Banks considering buying them out..?

Noffles · 04-05-2010 8:48am #1

Heard on the radio this morning that a bank(s) is looking at a cost to buy tracker mortgages off customers, with a regulator saying that is should be at around 25% of the mortgage. What are peoples opinions on this, I'm almost certain there would be a lot of people willing to trade in their mortgages for a lump sum pay out...
As I am in a tracker I'd be very wary of trading mine in, if the bank is willing to spend a good deal of money to get them back it would mean that they are very valuable?

tHE vAGGABOND · 04-05-2010 10:24am

banks have been at this for a while..

Regardless of what they offer you, say no to any offer! Its in your interest to keep your tracker, think long term, not just a few grand now [and a higher monthly interest rate for 20+ years].

Noffles · 04-05-2010 11:23am

Yes, these are my thoughts... but you never know what they may offer though and to some it will look awfully handy!

gandalf · 04-05-2010 11:39am

No way they are getting me off my tracker (unless they pay the whole mortgage off

)

seamus · 04-05-2010 11:42am

Well it depends on the situation. 25% could be the difference between coming out of negative equity in ten years, and coming out next year. I can't really see the banks offering 25% of the mortgage unless they expect the standard variable rate to rise significantly above the ECB rate.

However, for those who need to upsize (or downsize) to a property which suits their needs, the prospect of getting out of negative equity now and starting again would look very appealing.

Thoie · 04-05-2010 11:53am

When I was looking at fixed rate mortgages initially, someone made a very good point to me. At the time interest rates were low, and the fixed was obviously higher than the variable. I said "Oh, but the fixed might be handy if interest rates rise". It was pointed out to me that the banks have entire teams of people dedicated to working out these things, and if they've fixed a rate at a certain percent, it's because they're relatively sure they won't lose out on it even if rates rise.

I'd see the same situation if they tried to buy out my tracker mortgage. No matter how much cash they offer me, they'll have calculated it so that they don't lose out in the longterm.

Doing some quick sums.
If I currently owe 200k, at 1.5% over 25 years, the total cost of credit is just under 40k.

If the bank gives me 50k (25% of the mortgage), BUT raise my interest rate rises to 10%, still over 25 years, then 150k, 10%, 25 years - cost of credit is 245k !

Even if we take a more reasonable 5%, cost of credit is 110k. In this case, by taking their 50k, it actually ends up costing me an extra 70k.

Using the 200k, with interest rates at 5% example, they'd want to give me 50% and allow me to reduce the term to 14/15 years for me to consider it. I'd be losing out a bit, but would have the benefit of having my mortgage paid off a lot faster.

If I thought interest rates might rise to 10%, then they'd want to give me 75%, again with a reduced term.

Gurgle · 04-05-2010 12:01pm

seamus wrote: »

I can't really see the banks offering 25% of the mortgage unless they expect the standard variable rate to rise significantly above the ECB rate.

They are the people who decide the difference between ECB and 'standard' variable rates. This isn't something they "expect", its a clear statement of what they are planning to do.

Only if you're planning to sell in the next few years should you consider giving up your tracker for cash.

William72 · 04-05-2010 12:02pm

Thoie wrote: »

When I was looking at fixed rate mortgages initially, someone made a very good point to me. At the time interest rates were low, and the fixed was obviously higher than the variable. I said "Oh, but the fixed might be handy if interest rates rise". It was pointed out to me that the banks have entire teams of people dedicated to working out these things, and if they've fixed a rate at a certain percent, it's because they're relatively sure they won't lose out on it even if rates rise.

I'd see the same situation if they tried to buy out my tracker mortgage. No matter how much cash they offer me, they'll have calculated it so that they don't lose out in the longterm.

Doing some quick sums.
If I currently owe 200k, at 1.5% over 25 years, the total cost of credit is just under 40k.

If the bank gives me 50k (25% of the mortgage), BUT raise my interest rate rises to 10%, still over 25 years, then 150k, 10%, 25 years - cost of credit is 245k !

Even if we take a more reasonable 5%, cost of credit is 110k. In this case, by taking their 50k, it actually ends up costing me an extra 70k.

Using the 200k, with interest rates at 5% example, they'd want to give me 50% and allow me to reduce the term to 14/15 years for me to consider it. I'd be losing out a bit, but would have the benefit of having my mortgage paid off a lot faster.

If I thought interest rates might rise to 10%, then they'd want to give me 75%, again with a reduced term.

excellent points but might need to rework those numbers - ECB is currently at 1% which means most trackers are closer to (or over) 2% than 1.5%. Not meaning to be picky and as I say your points are well made - in general whatever they offer you - its worth more.

on that point whats the lowest tracker people have? - I've ecb +1.1 which as far as I know is good but not the best - anyone lower?

seamus · 04-05-2010 12:15pm

Gurgle wrote: »

They are the people who decide the difference between ECB and 'standard' variable rates. This isn't something they "expect", its a clear statement of what they are planning to do.

Oh I know that, but no-one has said that the banks are going to offer 25% of the mortgage. But if they do I would take it as an indication that the banks expect to raise and maintain their standard variable rate at least 3% above ECB for the long-term.

Personally, presuming you're not married to your property, then accepting a lump sum to get you out of negative equity might not be the stupidest idea in the world. You could sell up, rent and save for a few years, or you could move to a cheaper long-term property and save on your mortgage.

*If* the banks start offering these insane amounts for people to get out of trackers, then I wouldn't advise anyone to dismiss the offer without looking at their plans & options.

on that point whats the lowest tracker people have? - I've ecb +1.1 which as far as I know is good but not the best - anyone lower?

I'm +1.25%, pretty sure I was one of the last people to get a tracker. I know of people on +0.75%, but I haven't heard of any lower than that.

Thoie · 04-05-2010 12:29pm

William72 wrote: »

excellent points but might need to rework those numbers - ECB is currently at 1% which means most trackers are closer to (or over) 2% than 1.5%. Not meaning to be picky and as I say your points are well made - in general whatever they offer you - its worth more.

on that point whats the lowest tracker people have? - I've ecb +1.1 which as far as I know is good but not the best - anyone lower?

Mine is ECB + 0.53 (or possibly 0.55), which is why I was using the 1.5% as a sample figure.

seamus · 04-05-2010 1:21pm

I went ahead and did some figures, and now I actually wouldn't be surprised if banks start offering 25% (or more) off mortgages to get people onto standard variable rates.

I did a very basic table below. This shows the original principle, the new principle, the original cost of the credit at an ECB + 1% rate and the new cost of the credit if moved onto a variable rate. I did it for variable rates of 4% and 5% mainly because I was surprised at the 5% figures.

The two tables are for a mortgage over 30 years.

You can see that it works out *very* profitable for banks to get you onto variable rates, even if they offer a huge chunk off your mortgage.

They may insist that you go onto a 3 or 5-year fixed when you switch, in order to prevent you jumping ship, but they probably wouldn't. It's all swings and roundabouts to them - every person who gets off a tracker and sells up, stops costing them money and will probably get a new mortgage anyway.

Thoie · 04-05-2010 1:36pm

seamus wrote: »

I did a very basic table below. This shows the original principle, the new principle, the original cost of the credit at an ECB + 1% rate and the new cost of the credit if moved onto a variable rate. I did it for variable rates of 4% and 5% mainly because I was surprised at the 5% figures.

I am not an economist, and not making a prediction in any way, but while my 10% interest rate figure seems like a shocker to our generation, during the last recession (during the 80s) interest rates of 16-21% were pretty common. I'm not saying they'll hit that, but I wouldn't really blink if some fixed rate mortgages were on offer at 10% in the next few years. Obviously I'd cry a lot, but not blink.

Addition:
BTW, if the bank suddenly rings me tomorrow offering me 50% of my mortgage, then I'll predict that interest rates are heading for 10%

cgc5483 · 04-05-2010 2:02pm

seamus wrote: »

I went ahead and did some figures, and now I actually wouldn't be surprised if banks start offering 25% (or more) off mortgages to get people onto standard variable rates.

I did a very basic table below. This shows the original principle, the new principle, the original cost of the credit at an ECB + 1% rate and the new cost of the credit if moved onto a variable rate. I did it for variable rates of 4% and 5% mainly because I was surprised at the 5% figures.

The two tables are for a mortgage over 30 years.

You can see that it works out *very* profitable for banks to get you onto variable rates, even if they offer a huge chunk off your mortgage.

They may insist that you go onto a 3 or 5-year fixed when you switch, in order to prevent you jumping ship, but they probably wouldn't. It's all swings and roundabouts to them - every person who gets off a tracker and sells up, stops costing them money and will probably get a new mortgage anyway.

Very interesting analysis. Had been wondering about this myself and thinking it would have to be quite a large sum to get me off my tracker (+0.9%) before i would even consider it and not the measily amount Halifax were offering.

Just one thing to consider in your analysis. The ECB is unlikely to say at its current unprecedented low so the differential between trackers and variables will not always be the 3% from your calculations.

The 25% might get people out of negative equity but as you mentioned they might lock you into a fixed rate for several years thus preventing people from selling up.

dan_d · 04-05-2010 2:09pm

Watching this story with interest.Without working the figures, the following logic would seem to me to apply....
Trackers were seen by some as "not a good deal" while interest rates were so low in this country. However the ECB then cut rates, making trackers very attractive...however we all know this will not last. But our banks are now in so much trouble, that it would seem to me they are going to raise rates a lot over the coming years. Historically I believe the highest the ECB has risen to is around 4.25% (can't remember where I read that, so can't link to source, sorry) and that was during a period of high inflation. Taking all this into account, the tracker is definitely the better deal over the next number of years and in all likelihood into the future, because the likelihood of it getting much higher than our domestic banks is fairly low - seeing as they have such big problems.
I know this sounds airy fairy, but it's kind of hard to explain what I mean.Anyway, bottom line is that I'm sticking with my tracker mortgage!

Thoie · 04-05-2010 2:11pm

cgc5483 wrote: »

Just one thing to consider in your analysis. The ECB is unlikely to say at its current unprecedented low so the differential between trackers and variables will not always be the 3% from your calculations.

I think it's a good guideline though. As stated earlier, the banks won't set a fixed rate that could potentially end up lower than the ECB + a margin. And if the ECB goes up, you can be pretty sure that the banks will hike any variable rate along with it. The precise figures will change over the 20-30 years, but the scale of the cost/savings will remain roughly similar.

gpjordanf1 · 04-05-2010 2:24pm

Hi

If you were on a tracker and the bank offered you 25% of the remainder of the Mortgage.

Giving you X and you had Savings Y in various banks.

The total of X + Y is greater than your outstanding Mortgage. Would you be mad not to take the offer? Or is it better to have a lump sum around?

Or would the banks have a stipulation in the agreement that says you cant pay off the mortgage using the bonus from them?

Or would that be just tough luck on the banks?

Noffles · 04-05-2010 2:39pm

If they were to offer 25% of our mortgage I think we'd take it, since we're looking to sell anyway this would make sense and give us a house that would be easier to sell when we have less mortgage.

seamus · 04-05-2010 2:56pm

gpjordanf1 wrote: »

The total of X + Y is greater than your outstanding Mortgage. Would you be mad not to take the offer? Or is it better to have a lump sum around?

You'd be mad not to clear your mortgage. In the long term, credit will cost more than your savings can earn.

Or would the banks have a stipulation in the agreement that says you cant pay off the mortgage using the bonus from them?

I doubt that they could legally prevent you from using legally-obtained money to pay off a debt, however they could lock you into some agreement whereby you pay a penalty if you repay your mortgage within X years of your payoff.

Just one thing to consider in your analysis. The ECB is unlikely to say at its current unprecedented low so the differential between trackers and variables will not always be the 3% from your calculations.

Agreed. I worked it out before - the mean ECB rate over its lifetime is about 3.15%.

Since the ECB came into existence during a period of serious growth, this mean may be a little bit high, but by no more than 0.5%. If we take the average ECB rate to be 3%, then over a 30-year period on a tracker, you can expect to pay your 4% or thereabouts over that period.
Standard variable rates will probably hover around ECB + 3%, so someone on a standard variable can expect to pay 6% over those 30 years.

So plug these into the table and you get the below. Much less "wow", but much more realistic I think. It still shows that there is much benefit to the banks in dropping tracker debts in order to make mooney.

Thoie · 04-05-2010 3:03pm

gpjordanf1 wrote: »

Hi

If you were on a tracker and the bank offered you 25% of the remainder of the Mortgage.

Giving you X and you had Savings Y in various banks.

The total of X + Y is greater than your outstanding Mortgage. Would you be mad not to take the offer? Or is it better to have a lump sum around?

Or would the banks have a stipulation in the agreement that says you cant pay off the mortgage using the bonus from them?

Or would that be just tough luck on the banks?

I assumed that the purpose of the lump sum was to reduce the mortgage. If they said that, what's to stop you saying "I conveniently have a similar amount under my mattress, which I'm going to use to pay something off"

I might be wrong, but I can't see them writing a cheque for 25%

If I had enough savings (Y) - ooh, tough call. I don't really have those kind of savings lying around, but I think if I did then I might go for paying off the mortgage completely. In my case if I did that I'd hope to then start saving the amount I was paying each month (if that makes sense). So if I could suddenly pay off the mortgage tomorrow, and I'm currently paying 1,000 a month, I'd like to think that I'd then start saving that 1,000 a month in some kind of highish yield account. Having a large lump sum to hand would be handy at times as well though.

I know if I won double my outstanding mortgage in the Lotto tomorrow, I'd certainly pay off the mortgage completely. If I won exactly what's outstanding I'd have to give it some thought - my gut feeling is that I wouldn't entirely pay it off - I'd keep 50k or so somewhere convenient.

gpjordanf1 · 04-05-2010 9:11pm

Thanks for the reply & advice guys

Was listening to the Matt Cooper show and they said it would be in t he region of 15k, so not worth it to me anyway.
Thought would be more and would have sorted all my problems!

Perhaps I'll dream of being mortgage free tonight instead of the usual Baliff Nightmares

stepbar · 04-05-2010 9:31pm

seamus wrote: »

I went ahead and did some figures, and now I actually wouldn't be surprised if banks start offering 25% (or more) off mortgages to get people onto standard variable rates.

I did a very basic table below. This shows the original principle, the new principle, the original cost of the credit at an ECB + 1% rate and the new cost of the credit if moved onto a variable rate. I did it for variable rates of 4% and 5% mainly because I was surprised at the 5% figures.

The two tables are for a mortgage over 30 years.

You can see that it works out *very* profitable for banks to get you onto variable rates, even if they offer a huge chunk off your mortgage.

They may insist that you go onto a 3 or 5-year fixed when you switch, in order to prevent you jumping ship, but they probably wouldn't. It's all swings and roundabouts to them - every person who gets off a tracker and sells up, stops costing them money and will probably get a new mortgage anyway.

Anybody who has a tracker mortgage is likely to be a number of years into their mortgage.

Some people maybe on "interest only" and as such they are fcuked.

Your diagrams are only valid if someone started on a tracker rate and made a lumpsum reduction instantly. That scenario is not possible.

Zaph · 04-05-2010 10:11pm

Thoie wrote: »

Mine is ECB + 0.53 (or possibly 0.55), which is why I was using the 1.5% as a sample figure.

I've got ECB +0.5%. I'm pretty sure that's the lowest any of the banks went. I got it only a couple of months before they stopped doing trackers, although there had been a lot of messing around for a few months beforehand which held things up.

Derek Zoolander · 04-05-2010 10:31pm

anything like 20 - 25% of the mortgage and I'd jump at the chance...

looking at u pgrading anyway so I'll be saying goodbye to the tracker anyway... 20% of my current mortgage would cover the deposit on a new mortgage and some of the stamp duty....

wouldn't touch the offer if I was planning on living in my current house for the next 10 - 15 years though..

seamus · 04-05-2010 11:00pm

stepbar wrote: »

Anybody who has a tracker mortgage is likely to be a number of years into their mortgage.
...
Your diagrams are only valid if someone started on a tracker rate and made a lumpsum reduction instantly. That scenario is not possible.

Someone on an original 35-year tracker who is 5 years into their mortgage now, seems pretty likely

When I say "original sum", I mean "before the lump sum", not the original mortgage principle.

If you work it out over 25 years, the figures will be smaller but you'll still have the banks coming out with a sizeable profit.

stepbar · 05-05-2010 1:39am

seamus wrote: »

Someone on an original 35-year tracker who is 5 years into their mortgage now, seems pretty likely

When I say "original sum", I mean "before the lump sum", not the original mortgage principle.

If you work it out over 25 years, the figures will be smaller but you'll still have the banks coming out with a sizeable profit.

Assuming you go with the lower mortgage repayment. Anyone getting a lumpsum of 25% of their mortgage would be mad not to consider giving it up and keep the repayments the same as before. Same for anyone in negative equity.

But I will say one thing. I doubt it will ever happen as the cost for most banks would be in the billions.

Gurgle · 05-05-2010 9:04am

stepbar wrote: »

Anyone getting a lumpsum of 25% of their mortgage would be mad not to consider giving it up and keep the repayments the same as before.

The payments will only be the same as before until the bank raises its variable rate. Breaking from your tracker lets them do this as and when it suits their needs. Giving them the option during a credit crunch when you have no other bank to switch to would be crazy.

But I will say one thing. I doubt it will ever happen as the cost for most banks would be in the billions.

Those are the billions that they are a) getting from the state and b) 'supposed' to be making available as credit to the country's thousands of struggling businesses.

seamus · 05-05-2010 10:06am

stepbar wrote: »

Assuming you go with the lower mortgage repayment. Anyone getting a lumpsum of 25% of their mortgage would be mad not to consider giving it up and keep the repayments the same as before. Same for anyone in negative equity.

Well it depends on the offer. The banks aren't (that) stupid. They would probably insist that anyone getting paid off maintains their current term for 5 years or so.

But I will say one thing. I doubt it will ever happen as the cost for most banks would be in the billions.

Trackers are already costing the banks money. It's all about scale.
If (for example), a €200k mortgage costs me €67k @ 2%, but the bank is paying 3% (variable) on that money, then there's almost a €40k shortfall for the bank. It would look better for the bank's balance sheet and credit rating to give me €20k and get me off their books, or better yet, to give me €50k and increase the total cost of my mortgage to €140k.

And that's the other kind of thing we might see - banks offering low amounts (10%) or so if you will move your mortgage elsewhere, or large amounts of 25% if you agree to fix for a certain amount of time and then move to a standard variable.

Thoie · 05-05-2010 10:56am

seamus wrote: »

Well it depends on the offer. The banks aren't (that) stupid. They would probably insist that anyone getting paid off maintains their current term for 5 years or so.

This is why, back in one of my earlier posts, I mentioned that in order to make it worth it to me, they'd have to offer me x% off AND allow me to reduce the term by Y years as well. One of the things I made sure of when I took my mortgage was that there were no penalties for paying it off early - while I'm not expecting to win the lotto/get a random lump sum somewhere, who knows what could happen in 10 years time. The other point is that if your salary increases significantly over time, your current monthly repayments won't seem that big. We've all heard of people who are paying 2s6d a year for their mortgage.

seamus · 05-05-2010 11:03am

Thoie wrote: »

This is why, back in one of my earlier posts, I mentioned that in order to make it worth it to me, they'd have to offer me x% off AND allow me to reduce the term by Y years as well.

I've found that banks at the moment don't really have a major problem with people reducing their term, even if it does mean less return for them.

In reality, when I was doing up the figures above, the repayments over 30 years on 200k @ 2% were comparable to or slightly less than the repayments on 150k @ 4%. So if someone is just about managing their tracker repayments now, or don't have a huge amount of wiggle room, then reducing their term simply wouldn't be an option.

As I say, the banks will do their homework on this. You can be guaranteed that if the bank is appearing to be very kind and generous to you and you can't see any problem, then you're either in the 1% of people who are winning on the deal, or you're missing something.

05-05-2010 11:03am

Thoie wrote: »

The other point is that if your salary increases significantly over time, your current monthly repayments won't seem that big. We've all heard of people who are paying 2s6d a year for their mortgage.

Most folks realise that their salary is unlikely to increase significiantly over time, in many cases in 5 or 10 years time they will not be on what they were on in the height of the boom prior to levees and paycuts etc. Mortgage repayment will however rise over the coming years, becoming a higher percentage of most folks spend.

buck65 · 05-05-2010 12:36pm

Someone mentioned that anyone on a tracker interest only loan is fcucked , why is this?

Tracker mortgages - Banks considering buying them out..?

Comments