We have seen the rise of the ECB (European Central Bank) over the last three years and the possibility of more is never far from the mind of the ECB. The current cost of mortgages however, is not solely tied to the prices set by the ECB, instead it is down to banks piling on lending margin [that makes loans more expensive to the consumer but more profitable to the bank].
It is important to think about this when you think about where your money is going to be going in the future, margins have widened from about 0.5% or there abouts to more than 2% in many cases meaning that there is a 1.5% uplift in the actual mark up the bank is charging, that translates into an extra €375 per month on a mortgage of €300,000 (in interest payments only!).
The chances are that we will not see margins go as low as we did in 2005-2007 any time soon, and even if we do we will not be seeing it happen under the guise of ‘tracker mortgages’ which are a mortgage that has basically come with a price promise on the margin. Recently many lenders have scrapped tracker mortgages entirely, thus far the banks that have finished or ended the use of tracker rates are Bank of Ireland, PTsb, and IIB. Other banks are likely to follow suit suspending trackers, or removing them from their offering altogether, unless of course they choose to go the route that Ulsterbank has taken which is to make the margins so high that they cover every eventuality.
The long term implications for the market are that people will not switch mortgages as readily as they did in the past, the reason is that the customers who have good loans cannot break their mortgage (by switching/moving/topping up) or they will lose that contract. In essence every time you remortgage you kill off one loan and start a new mortgage, that is why the ‘lifetime of a loan’ was decreasing as time went by, in 2007 it was about 5 years on average (down from 7 only two years prior to that).
The opportunity however, is that some smart bank will enter into the ‘second charge’ market. A mortgage is a loan secured by the first lien on a property, a second mortgage though is different. It is a loan that is in second place as the name suggests, the easiest way to understand this is as follows, you buy a house and take out a mortgage. Actually what happens is you buy the house and sell it to the bank in return for the money. So the bank owns the house first and you own the rest of it (equity portion if there is any). When you sell the property the queue of people getting paid is the bank first then you.
With a second mortgage or second charge you basically borrow again, keeping your original mortgage, the second charge thus means that if you sell you get skipped in the queue, first the original bank gets paid, then the second mortgage or second charge bank, and lastly you. All this time you have the beneficial ownership of the property but the only part you can lay claim to is any equity, the rest is held as security against the loans.
The reason that a smart bank will be the one to do this is as follow – to arrange a second charge a bank would not be wrong in charging a slightly higher margin than normal because they do have diminished rights over the property, the advantage for the consumer though is that they would not have to clear the first mortgage so the bulk of the loan can remain on a cheap rate, granted, the original lender likely doesn’t want to keep that loan on their books because the majority of tracker mortgages are negative margin products now, they may press for full redemption, but in reality it doesn’t make any sense and both the NCA (national consumer association) and the Regulator should come out against this if lenders do try to do this.
Banks are not in the business of ‘helping’ in the philanthropic or charitable sense, they ‘help’ when they can make profit in the process, higher margins would be acceptable to both parties, customers get to keep an original lower cost loan, and the bank gets to charge higher margin on what they do lend – obviously one can’t cancel out the other (i.e. margin equalising savings) or there is no point but given the smaller loan size that would give room for good profit for the bank, clients get what they want and the bank gets what they want too, everybody wins.