Mortgage holders to pay for restructuring of banking sector

MORTGAGE HOLDERS are likely to pay a price in the promised radical restructuring of the Irish banking sector as lenders are forced to adopt more conservative margins on lending.

While there was no mention of mortgages in a bank rescue package that was short on detail, the plan is predicated on seeing restructured Irish banks return to the markets for their funding. That will be at rates in excess of what they, along with other banks in the euro zone, are paying the ECB for short-term emergency funding.

In its statement last night, the Government said the recapitalisation and restructuring of the banks was designed to deliver “a smaller banking system more proportionate to the size of the economy, capitalised to the highest international standards, with renewed access to normal market sources of funding”.

The pain will not be spread evenly, however. Tracker mortgages account for 55 – 60 per cent of mortgages in the Irish market.

These contracts are fixed and limit the lenders to a set margin above the ECB rate. Anyone holding a tracker mortgage will not face higher mortgage charges until the ECB raises its interest rates and this is seen as unlikely until the fourth quarter of 2011.

Of the balance, 20 – 25 per cent of borrowers are on fixed rates. The nature of their contracts means the rate they pay cannot be altered until the contract expires.

That leaves only those on standard variable rates. This group is estimated to account for 20-25 per cent of the market.

However, the majority are people who held homeloans for a long time, essentially before tracker rates became a feature of the market. As a result, the balances on these loans is smaller relative to the market average. Negative equity is also less of a risk.

Still, it means 160,000 – 200,000 homeowners face higher monthly mortgage payments. Holders of these standard variable rate mortgages have already seen the cost of their homeloans rise as banks took steps in the past year to restore profit margins.

That relates only to current mortgage holders. The intention is our replenished banks will resume traditional lending volumes. However, trackers are no longer a feature of the market, as the crisis made them too expensive. Future borrowers are likely to pay higher interest rates for homeloans.