Consumer Lessons from the Tracker Mortgage Scandal
Category : Mortgage News
The tracker mortgage scandal has been going on for nearly 20 years. It rekindled in the past couple of months with banks getting heavy penalties for overcharging customers.
So, what is the tracker mortgage scandal?
In simple terms, tracker mortgages became unprofitable for banks after 2011 when the European Central Bank interest rates fell close to 0%. Therefore, Irish banks resorted to not so customer friendly practices to switch mortgage holders to more expensive interest rates, such as fixed or variable. We will refresh what each mortgage rate means later in this blog post because it is one of the lessons to learn. So, read on and learn how you can protect yourself from getting into a bad mortgage deal.
1. Don’t Fully Trust Your Bank
The Central Bank of Ireland is in the middle of a tracker mortgage examination, which is assessing all banks that offered tracker products in Ireland. The country’s six main mortgage providers – AIB and its EBS subsidiary, Bank of Ireland, Ulster Bank, Permanent TSB and KBC Bank Ireland – have set aside €1.1 billion of provisions to date to cover redress and compensation, expected regulatory fines, and other costs linked to the State’s biggest financial overcharging fiasco.
Permanent TSB was handed a €21 million fine for breaches that impacted on more than 2,000 of its customers as part of the wider tracker mortgage scandal. It is expected that other lenders responsible for this overcharging of customers will also face fines from the regulator.
Why are the banks paying these fines?
Back in 2006-2008, tracker mortgage rates were higher, and banks offered clients to move to fixed rate for a few years. The customers’ understanding was that they will get back on the original tracker mortgage after, but that is not what necessarily happened.
In many instances banks would not return customers to their original tracker rates. Instead customers paid higher fixed-rate and variable-rate loans.
Takeout: Do not sign blindly everything that is offered to you by your bank. Ask an independent mortgage broker for advice if in doubt, it is usually free!
2. Understand Mortgage Interest Rates – Explained Simply
You will be a lot less likely to enter a bad mortgage deal if you understand how mortgage rates work. It is not that hard to get your head around; an independent broker is non-biased and will guide you through any options.
Variable Mortgage Rates
Variable rates offer flexibility. They allow you to pay extra off your mortgage and may subject to lender approval extend your mortgage term or top up your mortgage without having to pay any penalties. However, because variable rates can rise and fall, your mortgage repayments can go up or down during the term of your loan.
Standard variable rate
The banks set these rates based on various factors, such as cost of loans, loan risks, market competition, etc. The bank will have a Policy Statement of how they determine their variable rates. If you are on a variable rate, you can shop around for a better rate and even a cash back. This is what most people don’t do, and they should! Variable rates differ from lender to lender, so choose carefully.
Tracker variable rate/tracker mortgages
No longer available to new customers however they work as follows: they are set at a fixed percentage or ‘margin’ above the European Central Bank (ECB) rate. For example, ECB rate plus one percentage point. So, if the ECB rate rises by a percentage point, so does your rate. It will also ‘track’ the ECB rate when this rate goes down. If you switch from a tracker mortgage, you may not have the option to get a tracker rate again. So, you need to carefully consider your options.
A Discounted rate is a temporary rate, set below the standard variable rate. This is an incentive to new customers and gives you lower repayments for an initial period. At the end of that time, you have the option to go onto the fixed or variable rate on offer at that time. Before you accept a discounted offer, make sure you know what rate you will pay after the offer ends and how much it will cost you in total. The discounts currently on offer normally insist on you opening a current account with that lender.
Fixed Mortgage Rates
Fixed mortgage rates are probably the most popular choice in 2019. With a fixed rate mortgage, your interest rate and monthly repayments are fixed for a set time. Fixed rates are commonly available over two to ten years. Although a fixed rate means your repayments cannot increase for a set period, your repayments will not fall during the fixed rate period. As a result, you could miss out on lower interest rates and lower repayments. During the fixed rate period, you may face penalties if you want to switch lenders, move to a variable rate or pay off all or part of your mortgage. Also, you cannot usually pay more each month than your standard repayment. Some fixed rates come with cash back which is yours to spend once the mortgage completes.
3. If in Doubt, Independent Mortgage Advice is mostly Free
Mortgage brokers are unbiased parties, who have access to a wide range of lender rates at their fingertips. This means, they can advise you on the best lender for your situation. You will not have to worry about the fine print or understanding mortgage jargon.
Mortgage123 does not usually charge a fee, so you are more than welcome for unbiased, expert advice. Even if you have an approval with a bank already, it is not too late to run it by us.
4. Compare the Market Every Couple of Years
In fact, the Central Bank of Ireland is attempting to raise awareness of mortgage switching. New Central Bank rules relating to current mortgage holders have come into force since January 2019. These rules are in response to 2015 findings that more than one fifth of borrowers could save money by switching. The new rules will make it easier for bank customers to get information about savings on their mortgages. Furthermore, this will encourage competitiveness in the market and better mortgage rates for customers.
Although the Central bank has extended new rules to raise awareness of switching, identifying the best deal on the market may require some professional advice. There isn’t enough awareness that brokers can do that switch at no cost and recommend the best available switch.
At Mortgage123, we pride ourselves on our Mortgage Switcher service.