Mortgage Margins Will Drive Bankruptcy in Ireland
“Irish Bank Lending margins have been on the rise over the past few years, especially this year. With almost 70% of Irish mortgages on Tracker rates, the banks can’t adjust their income levels from these products. Therefore they have to go after other products, namely variable rate mortgages.“
Peter James Tompkins – My Financial Window
Peter Tompkins MD of The Financial Window
Last week I spent some time financially educating new clients by going through “The Financial Window” coaching program. Even though one client was a SME owner and the other a private individual, the same knowledge issues arose. The 3 key areas for further development and understanding were Mortgage rates, Savings rates and Pensions.
So lets review Mortgage rates in this blog post as a lot had been said on the subject over the past few days. We will focus on the key types of Mortgage Rates, The European Central Bank (ECB), Irish Bank Lending Margins and finally Our Regulator.
Lets start by looking at the 3 key mortgage rate offerings:
- Tracker Rate – A tracker rate simply tracks the movement of the ECB rate and the banks add a margin to this rate. Current ECB rate is 1.25%, so that rate plus the banks margin = Your Tracker Mortgage Rate.
- Fixed Rate – A fixed rate is set for a fixed period of time, usually 3,5 or 7 years in Ireland (in America you can get 30year mortgage rate and it’s something that needs to be considered in Europe). Your rate will not change during this fixed period and when the term ends you get to decide on a new time period and rate.
- Variable Rate – A Variable rate can and will move at the banks discretion. It can move higher or lower. It was designed to move inline with the Interest Rate Market not the ECB rate.
The ECB got a new President last week in Italian Mario Draghi. Remember his name, as he will be very important in your mortgage life over the coming years. His new nickname has already been coined as “Super Mario”, as noted by Charlie Weston at the Irish Independent. Well Super Mario last week surprised almost the entire market (51 of 55 Economists said he would not cut – So only 4 got it right, oh and Charlie Weston also via Twitter). Rates were cut by 0.25% to set the new ECB rate at 1.25% (remember: this is what tracker rates are set against). And in Ireland we have 400,000 approx. mortgages on tracker rates. So the rate reduction is good news or maybe not for everyone.
Irish Bank Lending margins have been on the rise over the past few years, especially this year. With almost 70% of Irish mortgages on Tracker rates, the banks can’t adjust their income levels from these products. Therefore they have to go after other products, namely variable rate mortgages. In my blog post on 8th August, I said that the banks would hit this area very soon. Three days later, two banks increased their variable rates and this morning we had National Irish Bank announce a 1.00% increase in their variable rate. I am not surprised and they will argue that it only brings them in line with other banks in Ireland.
So why is this happening I can hear you all cry out? The answer is very simple. The banking system in Ireland is broken and until we get it fixed, the little guy is going to continue to pay for the mistakes of everyone involved. Look at it this way, if you had a business and sold just one product, what would happen when the price changed? You would put up your price by increasing your margin to stay in business. But with this same product that you have sold for years, your clients still need to pay you back but at the original agreed margin, not the new margin. And as you also need to source more of this product, to keep your business running, you are now faced with the price having increased beyond what you can sell it for. What do you do? You need to cut your cost base dramatically, become more competitive and innovative to sell a new type of product. The product that I am talking about is “Money”.
So here is your financial education reality check. The relationship between the ECB rate and actual Irish mortgage rates has been broken for over 3 years. The widening of bank lending margins is pushing more homeowners towards greater arrears and into bankruptcy with the Regulator currently powerless to stop the increases!
Last week I educated a new client on how they could move their mortgage to another provider and not have to continue to take the increases to their variable rate. They didn’t understand how the loan to value (LTV) on the mortgage actually worked. A little financial education can go a long way in helping your personal and company finances. Don’t wait until its too late to get started, My Financial Window is here now to help you. Just pick up the phone.
Until next time
Regards
Peter James Tompkins
Peter James Tompkins is Managing Director and Financial Educator at My Financial Window Ltd. As Financial Educator, he interacts on a daily basis with My Financial Window clients and is responsible for the financial education development of SME owners in Ireland.
