Stick with your PTSB tracker mortgage

Q&A:Q My daughter (a 29-year-old teacher) purchased an apartment in 2008 for €289,000 and received a mortgage of €260,000 from PTSB. After an initial 12-month discount period, she was offered the choice of continuing with the variable tracker mortgage or fixing the rate. Therein lay the problem. PTSB were/are out of line with most of the other banks with their fixed rates. Their three-year rate in July 2009 was approximately 5.65 per cent, while AIB, BOI, etc, were around 3.5 per cent.

As the value of the apartment has reduced, she is unable to switch and is stuck with the variable rate, which we all expect to rise this year.

My belief is that PTSB are not being competitive because they do not want any new business. Considering the Government support, they should in fact be doing business and helping existing customers. Why can they quote such high fixed rates when they are in the same market as the other banks and should be able to raise funds at the same rate?

Mr DMcM, e-mail

Q There are two issues here – Permanent TSB’s right to set their rates, and the type of mortgage your daughter now has.

The good news, if indeed she does have a variable tracker mortgage, is that she is in possession of what is probably the most sought-after mortgage these days. Put simply, a tracker mortgage is tied to the European Central Bank (ECB) rate. The lender cannot arbitrarily raise its margin above this threshold.

Unfortunately for the banks, the financial crisis means they have been paying more in the money markets to raise funds than the ECB rate.

As a result, they have been losing money on trackers – so much so that these products have now been withdrawn from the market. Those fortunate homeowners holding a tracker would generally be advised to hold on to it.

While PTSB has raised its ordinary variable rates once and is now rumoured to be planning another hike, tracker mortgages will not be hiked. Of course, if and when the ECB raises its rates, the cost of the trackers will rise by a similar amount.

I can see the attraction of fixing rates in the current climate for the security of knowing your monthly outlay, but your daughter is doing reasonably well in the circumstances.

As you note, the fact that your daughter’s loan-to-value has risen due to falling property prices does mean she is unlikely to be able to switch mortgage provider.

On your main point, as the Minister for Finance pointed out in the Dáil yesterday, it is up to the lenders themselves to set their mortgage rates.

While Permanent TSB has availed of the State guarantee, it has paid for the privilege. Importantly, it has not required recapitalisation, nor does it intend to transfer loans to the bad bank National Asset Management Agency.

Banks do not have to take new business and it may indeed be the case that PTSB is pricing itself out of certain elements of the mortgage market because it believes the margins are unsustainable. Many of the foreign banks here certainly did.

No insurance for mortgage default

Q A recent article in the New York Times reports the view of a law professor at the University of Arizona that more Americans should simply walk away from their “underwater” (ie negative equity) mortgages and save themselves hundreds of thousands of dollars. I understand that in Ireland, a lender can repossess assets other than the house in the case of foreclosure, until the loan is repaid in full.

That article, however, mentioned that in certain US states, borrowers pay an extra fee on their mortgage payments to insure for their right to default without recourse. Are there such particular provisions in some Irish mortgages?

Mr MD, Dublin

A I believe what you are referring to is mortgage default insurance, a product that is available in certain jurisdictions. However, it is not something that has yet appeared in the Irish market – and given the state of the property market, it is extremely unlikely to become available here anytime soon.

Is there a return on prize bonds?

Q Is there a guaranteed rate of return on prize bonds? I recall mention at one stage of 3 per cent of funds invested, but can no longer locate this statement on the website. Prize bonds are said to be tax-free, but does this also apply to non-residents?

Ms NB, e-mail

A There is no guaranteed rate of return on prize bonds. When you buy a bond, it is entered in each draw. Even if you win a prize on a particular bond, it is entered in subsequent draws.

The only guarantee, as such, is that you can cash in the bond at any time. The bond is redeemed at face value, with no allowance for inflation. The tax-exempt status of bonds applies, as far as I’m aware, regardless of tax status.

Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2, or e-mail dcoyle@ irishtimes.com. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions.