A major shake-up in the mortgage market is on the cards following a move by Permanent TSB to be announced this morning which will allow existing customers sell their homes and take out new mortgages while retaining a significant portion of their tracker loans.
While the bank refused to comment on the precise details of the plans last night, it is understood it is likely to charge a slightly higher margin than currently applies when issuing the new trackers. The new rate will apply to the existing mortgage which is transferred to a new home. Anything above that will attract the current standard variable rate (SVR).
Variable rate
While the new arrangements will see homeowners who wish to sell their existing homes and buy another one pay more interest, it will still provide them with substantial savings compared to the alternative they currently face of forgoing their tracker and taking on a new mortgage on variable or fixed rates.
Typical tracker rates are set at between 0.5 and 1.25 percentage points above the European Central Bank rate which is currently at an historic low of 0.25 per cent. Standard variable rates are typically higher than 4 per cent.
The bank is likely to add an increased margin of about one percentage point on to any new tracker it facilitates. This would see a customer who has a current tracker rate of 1.25 per cent paying a rate of 2.25 per cent on the portion of their mortgage which they transfer to the new property.
This is significantly less than the SVR rates currently offered by Permanent TSB.
Adding one percentage point to a tracker mortgage would see the monthly cost of servicing a €100,000 loan increase by about €60 compared to a monthly increase of more than €400 were a customer to switch to a regular SVR.
The high cost of switching has made many of the 375,000 tracker mortgage-holders extremely reluctant to move house because they will have to surrender the cheaper loan.
Some have argued that this has led to a shortage of family homes, particularly in Dublin.
Bank of Ireland already offers a tracker transfer product but it increases the mortgage being transferred by 1.3 percentage points and does not allow it to stay in place for the full term of the new mortgage. Typically, those who transfer will have to surrender their tracker after five years.
Permanent TSB will outline the plans it has been working on for almost a year this morning and while it is unclear how long it will allow customers maintain the tracker rate on their new property, sources have suggested the re-structured tracker is likely to continue for the full term still to run on the existing tracker.
Lose money
Trackers have proved to be ruinous for the State’s financial institutions and while PTSB is still likely to lose money on any new deals it facilitates, the higher rate will at least allow it to cut into the losses.
It should also see it generate new business for its SVRs as the trackers will only apply to the amount of the current mortgage a home owner has. Anything above that will attract the higher SVR rates.
The move is likely to force the hands of other banks which have been reluctant to develop products to allow homeowners move on.
PTSB, which is 99.2 per cent owned by the State, has 174,000 mortgages on its books. It recorded an underlying loss of €449 million in the first half of last year.
