Is a tracker better than a fixed rate?

This is a question that was put to me recently, it made me grin on several levels, firstly because the mainstream public still don’t fully realise that tracker mortgages are now gone from the market, the second was that I was asked so close to a rate cut.

First things first, Tracker mortgages are now a thing of the past, every lender has withdrawn them from the market. The tracker mortgage was a transparent and easily understood it was based on something that people understood and could read up on easily. I would challenge most people to quote the morning bells 3 month euribor at the drop of a hat, even those of us in the mortgage industry.

The other part about ‘better than a fixed rate’ is this, rates just dropped, if you fixed your rate between June of 07′ and October 08′ then you missed a 0.25% rate hike in July, but the rates from 07′ had priced in the cost of funds for the most part, the …

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Mortgage Rates

Mortgage rates are normally described as a percentage, be it 5% or 3.98% the important thing to remember is that it merely interprets the cost of that credit to you as a financial debtor to the provider. When you compare rates it is also important to have an understanding of where they came from.

For instance, which rate is better an ECB (European Central Bank) tracker of 5% or a standard variable of 5%? They are both the same numerically but the tracker has a guaranteed margin the SVR (standard variable rate) does not so if the ECB change rates, for instance the way they cut rates in mid-October the standard variable might not come down the full 0.5%.

To be fair most banks have decided to pass on the ‘full’ rate cut, but what they had done in the interim of rate movements was to increase the margin on their SVR’s when the ECB was actually standing still between June of 07′ and …

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Rate Expectations

In the Book Great Expectations by Charles Dickens we saw Pip help out an escaped convict, one who had done some wrong, the convict later becomes an anonymous benefactor of Pip’s helping him lead the life of a gentleman and Pip becomes totally removed from the old life of poverty he lead, only to one day find out who his invisible helper was, it shakes him to the core.

There is something in this story that hit me today hearing about the Fed rate cut to a base of 1% and current public sentiment towards the market. The market is like the convict who had done something wrong in the past and who later is the benefactor. It is easy to look at the mistakes made by the finance industry, and alarmingly easy to funnel all wrongs towards it, …

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The stage is set for Euribor Trackers now that ECB ones are gone.

The market recently witnessed the death knell of the last tracker available, it was Leeds Building Societies high margin ECB + 2.2% offering. Previous to this we heard announcements from Bank of Scotland, AIB, BOI, ICS, Haven, Ulsterbank, First Active, IIB, PermanentTSB and every other lender that trackers were being withdrawn.

So now we have moved from a market where trackers were a key point of competition and value to one where they don’t even exist. This has had a key effect of removing transparency from rates, for instance, how is a Variable Rate determined? The future landscape of mortgages is likely to be some mish-mash of “fixed-variable-another fixed-fixed again-back to variable” it will be a non-transparent massacre of rates where the concept of ‘customer inertia’ will become only stronger.

If people find themselves in a market where they don’t understand long term value then there can be no responsible long term value decisions made. To put that in perspective: If you are getting a …

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DON’T GIVE UP YOUR TRACKER MORTGAGE!

The news has has several stories recently about banks contacting clients and asking them if they would like to come off their tracker mortgage and instead go on a fixed rate or even a variable rate. The assertion is that if you have a fixed rate during a downturn that you are ‘protected’ from changes in the ECB rate changes.

That is true, but you are also protecting yourself from upside advantage. In a nutshell, during a downturn there are some monetarist moves that Central Banks will make, such as dropping rates to increase the movement of money in an economy, if you are on a fixed rate you don’t get the rate reduction and the outlook for at least the near future is that rates are going to come down. On those grounds alone you would have to question the rationale of a …

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DON'T GIVE UP YOUR TRACKER MORTGAGE!

The news has has several stories recently about banks contacting clients and asking them if they would like to come off their tracker mortgage and instead go on a fixed rate or even a variable rate. The assertion is that if you have a fixed rate during a downturn that you are ‘protected’ from changes in the ECB rate changes.

That is true, but you are also protecting yourself from upside advantage. In a nutshell, during a downturn there are some monetarist moves that Central Banks will make, such as dropping rates to increase the movement of money in an economy, if you are on a fixed rate you don’t get the rate reduction and the outlook for at least the near future is that rates are going to come down. On those grounds alone you would have to question the rationale of a …

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Less tax and simple bankruptcy could be the best solution

As we await what is being described as a ‘savage’ budget, it is important to remember some of the ideas being thrown about may appeal prima facie. One disappointing suggestion I heard today was a call for tax bands of 50% (this came from an economics professor too!). In this blog we have said for some time that there are only two solutions to the deficit, firstly taxes must go up, secondly we have to stop spending. However, there is a point at which higher taxation actually reduces the tax take (more on this later in the article)

One thing that we need, in light of what will likely be testing times is to consider the impact of tax changes and also the need for a simplified bankruptcy system. There are currently (so we hear) thousands of well to do ‘non-dom’s’ in the UK who are planning to leave because of changes to the tax system. Ireland is a small …

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House prices: movements and trends in Ireland 2008

We have said for some time that house prices will fall throughout 2008, we saw a recent article in the Sunday Tribune saying that house prices would fall a further 10% in 2009. Our belief has been for some time that we will see the most dramatic drops in Q1 & 2 of 2009 and that after that the speed of decent would slow down considerably, coming to a ‘no growth’ landing some time in late 2009. There are reasons for this which we will explain below.

Firstly we have to see the market accept the rationalisation that is upon it, sites like Irishpropertywatch.com are tracking the fall in prices, yet there are still well publicised people in the construction and business communities calling for government intervention. This must be resisted as must all irrational request on the government. They hold the purse strings but that doesn’t mean they have to spend until lobbyists or special interest groups are satisfied, they must instead …

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Interest Rates: The Fed, The Bank, and the ECB

Interest rates are again in the headlines as the Fed, the Bank of England and the ECB all had meetings. It may be a little known point but in the past there was some currency co-operation, namely the Plaza Accord and two years later the Louvre Accord and although there is no official ‘strategy’ we may start to notice that central banks act with at least some degree of collusion as they try to solve global economic issues. That last sentence might confuse, on one had interest rates are not connected to currency strengths but interest rates do have an effect on inflation and inflation can be brought about by currency manipulation (namely having too much in supply).

The Irish rate of inflation thus far in 2008 dropped from 5% in June to 4.4% according to the Central Statistics Office (CSO) the article in the Times didn’t mention if this was headline or core inflation. It has been our belief for some time that …

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Changing bank trends

Today we will highlight some changes that we may see come into the Irish mortgage market in the near future, as well as some suggestions from the think tank here in Irish Mortgage Brokers. The current economic climate is one where it is easy to look back and spot errors that were made, but rather than focus on the blame game we hope to consider ideas that will prevent a property asset bubble from occuring again as well as some ideas that could help promote sustainable lending, these ideas won’t beat the recession this time around but it may be good medicine for the future housing market.

1. Long term fixed rates: In the USA the prime mortgage sector is not going into the same kind of default as the rest of the sub-prime and Alt-A loans are, in the cases that they do it is down to redundancy and the other things that generally cause bad debt irrespective of the wider economy. One reason that this is happening is because loans there are taken out on a long term …

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