The story today from the Examiner by Stephen Rogers is worth a read, but at one point the IBA chief Ciaran Phelan states “Banks may still attempt to offer terms to customers to woo them off trackers, but we believe that tracker customers would need a break-deal offer in excess of 25% to make it worth their while.”
I don’t know where that calculation comes from – because it ignores the time value of money on a future debt and also doesn’t take into account current debt pricing issues. For instance, rates on all sorts of financial products are rising, if you have non mortgage debt this is a concern. It is the ‘weight’ of debt rather than the ‘rate’ which is the problem for the majority of people.
By that I mean: a person who is struggling with several debts may be well served by letting go of their current tracker, but that doesn’t mean they have to abandon it, a bank could just as easy turn around and say ‘we’ll give you €100 for every basis point you give up’, so in re-pricing your tracker (we’ll take a €250,000 mortgage over 25yrs at ECB + 1%) you’d go from a monthly payment [before TRS if applicable] of €1,059 per month to an ECB+2% rate which would cost €1,185 but you’d have €10,000 in your pocket.
This is just to give an example, but if you had €10,000 in credit card debt ratcheting up c. €150 per month in interest before loan repayments (and getting worse as interest is added to principle), where if you were making full payments with a view to clearing it in three years that would cost about €400 per month then your net position from a cash-flow perspective is actually better by getting rid of part of your tracker mortgage.
In this case you are paying €126 per month more for having repriced, the bank get their margin back, and you don’t have to pay c. €400 per month on unsecured debt, that is a net savings of €274 of after tax income. Not bad for a days work?
A slightly different example is below, in this case a person with a €250k mortgage at ECB+1% has €12,000 of other debts on a 3yr loan at 10%, in this case a reprice would release €10,000 and bring their short term loan down to €2,000 (far more manageable) and the main mortgage would go up, but the net cash flow position is improved and that money could easily be put away into savings.
The thing that people need to be aware of – and which the Regulator warning didn’t say was actually happening on any concerning level – is inducements, but there are plenty of reasons a borrower might want to talk to a bank about giving up a part of their tracker if it makes financial sense for their situation, it certainly won’t cost them 25% in payments, nor will the bank offer 25% off the capital.