For almost the last decade we saw a market develop where customers were king, and where banks competed for their business, this was an era where ‘refinancing’, ‘switching’, and ‘re-mortgaging’ became a common occurrence, in the 1990’s the re-mortgage market was very small in comparison to where it went from 2000 onwards. The reason for the upsurge was that loyalty doesn’t pay when it comes to the Irish banks, they were giving new borrowers better rates and charging existing borrowers more, the choice of fixed rates for an existing borrower were always more expensive than for the person who had jumped ship elsewhere and come to a bank as a fresh client.

Today we are seeing something that has long been unfamiliar, banks are intentionally being uncompetitive, pushing rates to the point where they are not doing any marginal lending and where their average loan is reaching higher and higher above the ECB currently several banks have broken the 6% mark meaning that rates are now at the highest they have been in almost a decade.

This means that lenders who re-mortgaged in the last five years or so, specifically the ones who opted for tracker mortgages, are now stuck with whoever they put the loan with. Maybe ‘stuck’ is a bad word, the actual situation is that we will likely never see tracker mortgages with the low margins that we saw before return to the Irish mortgage market…. ever.

Many loans reached the region of ECB + 0.5% to 0.75% and that means that the margin on these loans was really narrowed down to the margin line, it was great, there was excellent value to be had, then along came the credit crunch.

Banks will be delighted to see people move away from their low margin loans because they are funding them at a loss, borrowers on the other hand are also in the reverse position they used to be, staying loyal to a bank if you are on a low margin tracker now pays, the bank won’t be grateful for this loyalty but that doesn’t take away from the fact that staying put if you have a low margin loan is now going to be a reality for many mortgage holders.

What will this mean in the long term? It will be an interesting situation, and one where the adage ‘be careful what you wish for’ comes into play, recently the average life of a loan was five years. However, if you can’t find an equal or better margin by going elsewhere for a loan then we will see this start to rise, and the average life of a loan is set to increase as people stay put, this would normally be music to the ears of bankers but in this case it is actually to their detriment as they roll funding at high margins in order to keep their book intact. Many tracker loans are now negative margin for banks and that will ultimately be reflected on their balance sheets, hence it comes as no surprise that we are seeing epic drops in share prices at many financial institutions, and this is not restricted to Ireland.

UBS recently had four directors step down as shareholder pressure and board issue came to the fore, UBS has had write-downs of over $38 billion since the start of the crunch. The Ben Bernanke of the US Fed has commented today that they will continue to support banks during this crisis and that they will do whatever is required in order to maintain any degree of stability possible, and this means they are willing to dictate policy based on what will keep the market alive. The ECB on the other hand is taking an inflation only approach and this week they raised the base rate by 0.25% to 4.25%.

Some commentators feel that raising rates is a mistake, and that a mono-vision focus on inflation may result in a wider market downturn, however, if we are to believe the central tenet of controlling inflation then this has to be a welcome development, controlling inflation is no easy task and inflation is easier to prevent than cure, both sides of the Atlantic have issues, in the USA it there are serious inflationary pressures and that is incredibly risky, in the EU we are curbing inflation at the expense of the economy and lack of or negative growth presents a huge problem too.

Getting back to the purpose of today’s post we can garner a few vital pieces of information, firstly, interest rates are not going to go back to the bare-bone margins we saw come about in the years before 2008, so if you have a good margin tracker you actually risk losing that deal if you refinance so it is vital that if you need to top up that you try to keep the original loan and do the mortgage refinance as a separate top up account or go to some other form of finance so that you can remain locked into a valuable proposition that we are not likely to see in the Irish mortgage market ever again.

The prediction in this article is that we will see the average life of a loan start to increase, as customers refrain from switching in the medium term due to decreased rate competitiveness on an ongoing basis.