Tracker options are window dressing in a broken market

This originally appeared in the Sunday Business Post on the 6th of July 2014

Most of the “move your tracker” options are window dressing when you look at the potential impact on the credit market. Banks are allowing a person to ‘move their tracker’, which shows that you can shift it around, but they wouldn’t let a person ‘sell their tracker’ to a person who wants to purchase their home.

This shows the true intention: it is to re-profile loans that would otherwise never change. These new choices exist for three key reasons. The first one is what we just mentioned, “re-profiling”.

“Portable tracker” products have one thing in common: you’ll pay more for the same loan amount when you move it, either on day one or in year five onwards, depending on which offer you may go for. The likes of Bank of Ireland will give you five years on your old rate, then shift you to their market trailing variable rate.

When it comes to lending margin the extra 1 per cent on an AIB tracker will nearly double the interest rate (given the near zero base rate) and margin (average being 1 per cent rising to 2 per cent).

Putting aside AIB’s desperate need to be seen to be socially responsible, because the shareholder value of this scheme versus the cost of implementation is unlikely to benefit the taxpayer, the second thing it does is create “new lending” that isn’t new lending.

The statistics will look better, the new loan and the top-up will show that credit is flowing, but this is akin to taking a person’s sandwich, giving them another and claiming you are feeding the hungry. It’s plain vanilla banking PR.

There is some cause for rejoicing. The theory that “trackers are consigned to history” is no longer true: you can now take out a new tracker, although it can only be a new version of the old one plus more margin.

Which brings us to the third purpose, to focus credit towards more “tried and tested” borrowers who have a proven track record.
In lending, if you ever have a choice between a new client who looks good and an existing client who you know made payments throughout a financial crisis, then you opt, always and forever, for the existing client.

The mortgage market needs more volume. This is just a marginal game of Whack-A-Mole because it isn’t growth. It is going to be lending made from the existing pool of lending. It isn’t going to significantly increase credit or resolve the supply of housing.

There is the trap of negative equity. This is decreasing as prices rise, and of tracker loans stopping people from buying houses up the ladder from where the people holding these loans are now.

But many have chosen to rent their home and rent elsewhere. This partly explains the 46 per cent increase in people living in the rented sector.

Within the industry, we are seeing a few worrying trends. The credit cycle appears to be turning at a time the market is rising.
This may eventually provide huge upward impetus that the Central Bank won’t be able to control.

How we witness this is repeated loan offers but not draw-downs. This translates into a wall of “latent credit” that is building as buyers don’t close loans, but are ready and generally willing to do so if they can find a property.

Mix this with cash buyers, Reits, renters who also need supply and there is every reason to believe we will see a pressurised system which is showing strain, even prior to credit being released in any meaningful way.

In terms of mortgage products, it would do more for Irish consumers to have options for long-term fixed rates greater than ten years, to avoid both the uncertainty of interest rates generally, and the vagaries of Irish banks in particular.

Other products that were killed off, like current account mortgages, are also a loss to consumer choice. We have come from a market where there were many options and features to one of a variable rate based on the loan to value and small selection of overpriced fixed rates.
Perhaps the better choice would be to focus only on solutions that increase supply where it is needed.

This doesn’t require happy headlines of products designed to make life better for the customers of our second-most toxic bank. It requires fiscal and municipal input, which isn’t forthcoming, because any radical action will eventually expose the political failure to date of our national housing strategy – which we can’t even describe in those terms, as we don’t have one . . . a strategy, that is.

There are no figures available for how popular this move will be but, to date, we have seen only enquiries and no draw-downs of portable trackers. Which makes you think that, perhaps, the Irish consumer really has learned how to spot a pup when they see one.

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