Making Cents: Is it time to give up your tracker mortgage?

THIS article might be of interest to people who have a variable or a tracker rate mortgage who’ve seen the interest rate they are being charged increase 10 times since July 2022.

Many people, particularly those with a tracker mortgage are taking this pain and aren’t moving to fixed rates or indeed variable rates which may be lower, because if they do they’ll lose their tracker and they’re worried that if rates begin to fall again, and they will, they’ll miss out on what that lower rate might become.

And their rationale is well founded because up until rates began to increase, they had a good 10 years of paying anything from as little as 0.60% to probably something not more than 2%.

So, they were paying a lot less than most variable rates or even what very good, fixed rates were and not wanting to miss out on that if it happens again is the driver behind a lot of people doing nothing and holding tough.

Will we ever see those days of very low interest rates again, and if we do, how long will they last for, is a question I don’t think anyone knows the answer to.

But I want to tell you about an individual I came across recently who has a tracker mortgage and he’s giving it up and moving his mortgage to a new lender, and he’s not moving to a fixed rate, he’s moving to a variable rate.
And I’m going to tell you why.

It’s actually very simple really.

His current tracker rate is 5.65%, which is a 1.15% margin above the ECB rate. The term left on his mortgage is 24 years, he owes c. €200,000 and his present monthly repayment is €1,270.

He has been offered a variable rate of 2.95% from his new provider and if he takes them up on it, his monthly repayment will reduce by €125 per month, and here’s the other thing, the term on his new mortgage is going to be over 19 years.
So, he’s moving his mortgage, where he can take five years off the term at no cost to him and still have a monthly repayment which is €125 less than what he’s paying now.

When you stand them alongside each other, it really does show you what impact that rate differential of 2.70% has.

Product                      Repayments     Term

Tracker (Existing)          €1,270              24
Variable (New)              €1,145              19

I mean if someone said to you, you can reduce your mortgage term by five years and you’ll pay €125 less each month than what you’re currently paying, you might not believe them. You might think you’d have to pay €125 more each month, not less if you want to take five years off your term, but in this instance this gentleman doesn’t have to.

And who is this lender that’s offering him this rate?

His local Credit Union.

I’ll come back to them in a moment, but I just want to give you some more reasons why he’s moving and happy to give up his tracker.

The first is if this differential of 2.70% remained in place, he’d end up paying €104,252 less in interest payments.
Now who knows if it will or not, but with this new mortgage with his Credit Union he’ll pay back c. €61,498 in interest payments based on a rate of 2.95%. The amount of interest with his tracker mortgage assuming a rate of 5.65% is €165,750.
So, if he stayed with his tracker, he’s hoping his rate will fall by c. 48% from what he’s currently paying over the next 19 years if he’s going to just break even with his Credit Union. It’s probably more because if his rate does reduce, it’s likely to go down in small amounts which could last for long periods of time i.e. if rates reduce by 0.50%, his rate would become 5.15% and that might last for 12 months before another rate reduction happens.

There’s lots of moving parts that you have no control over and trying to run different scenarios is a difficult task and even if you do, it’s all guess work, you have no idea how long rates stay as they are and for how long.

What you have certainty over with a tracker though is the margin you are paying over the ECB rate and this gentleman knew his lender couldn’t charge 1.15% above the ECB rate. What he has no clue over is what the ECB base rate will ever be.
And the same can be said of what rate the Credit Union can charge them. What’s to say that in six months’ time they don’t decide to increase their rates by 4% and he ends up paying more than if he stayed.

I guess you have to make a judgement call on whether you think they will or not.

I think what might give you some confidence in believing that they wouldn’t is the fact that each Credit Union is owned by its members and all decisions and rates being offered are made at a local level rather than coming from one centralised head office.

And they’ve said unequivocally that they ‘exist only to serve its members, and not to profit from their needs.’ They’ve also very reassuringly said, they won’t ever sell your mortgage to a vulture fund.

I’m not a spokesperson for Credit Unions, I’m not a spokesperson for anyone, but I like them because each Credit Union is independent, and they’re a not-for-profit organisation and they exist solely for the benefit of its members, not stock markets or shareholders.

So, if you’re looking at your existing mortgage and wondering whether you could get a better deal elsewhere, perhaps you should include your local Credit Union in your search and see what fixed and variable rates they can offer you.

There’s another reason the gentleman I was telling you about is moving his mortgage to the Credit Union, and it’s because that €125 monthly saving he’s making, he’s going to divert it into his pension as an Additional Voluntary Contribution (AVC).
And when you factor in tax relief that he’ll receive on it, it means that over the next 19 years even at a moderate growth rate, he should have about €70,860 extra in his pension fund.

So, he has four compelling reasons why he’s okay and has no problem giving up his tracker and moving to a variable one with his local Credit Union and they are (1) he’s immediately reducing his term by five years (2) the interest saving could be as much as €104,252 and (3) he’s immediately saving €125 each month and (4) if he applies that saving to his pension fund, he’ll have an extra €70,860 in the pot when he reaches retirement age.

They’re not bad reasons and they’re his reasons and his numbers, and I’d say to anyone in a similar situation, get advice before you consider doing anything particularly if you have a tracker mortgage, because when its’ gone it’s gone. And that might be okay as well. Have a conversation with your financial adviser and they’ll run the numbers for you and they might suggest the difference is enough for you to move and they might not, it really will depend on what new rate you are being offered, who’s offering it to you, what term is left on your mortgage and so on. But get factual and indisputable information and numbers that are specific to you where you can make an informed decision which takes out that uncertainty and regret that you may have in years to come where you won’t be saying, I should have moved my mortgage or I should have kept it.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie