Tracker Mortgage Explained

Tracker mortgages, if you don’t know what they are, were introduced in the 2000s. They “track” the main lending rate of the European Central Bank (ECB). So if that rate is 2.5% you will get a rate that is 2.5% plus a fee from your own Bank (say AIB). This fee is usually 1%. Many people when they originally took out a tracker were then paying 3.5% in total – not that different from variable or fixed rates at the time.

But things changed. With the financial crash ECB rates went to zero and new restrictions on domestic Irish Banks meant they had to pass on large regulator costs to new mortgage customers. They also stopped doing trackers as they became unprofitable. In the mid 2010s all this meant that a tracker mortgage customer was paying ~1% and a new customer could have been paying 4.5% – a massive gap.

While this was the case, all mortgage brokers would have told you to keep the mortgage tracker as its much cheaper than fixed mortgages. This was true for over 10 years. But things change. Last July the ECB started increasing its rates and they are now at 3% – most likely going to 4.25% before the year is over. This would mean our mortgage tracker rate customer having gone from 1% to potentially 5.25%. Ouch !

As an example that many mortgage brokers use, if a customer has a €350k mortgage and its at the old 1% tracker rate they will be paying €1,126 a month. That same customer by year end could be paying 5.25% or €1,933. That nearly €10,000 a year coming out of your pocket!

Is there anything better than a tracker mortgage today ?

The cost of the tracker needs to be compared against the alternative fixed rates now available. Current mortgage trackers are costing about 4% plus, whilst the majority of fixed rates are lower than this. But fixed rates are also increasing too. When you can get a 5 year fixed rate for less than 4% you would be crazy to keep a tracker that could literally go to anything over the next 5 years. Another war, more covid etc and you could be paying 7%, 8% plus – who knows. With a fixed rate you have a guarantee of the monthly repayments and can plan your life accordingly. Why risk it ?

One viewpoint we get from customers here at Pangea Mortgages is that they believe interest rates will fall back to where they were in 2021 and that the tracker mortgage will go back to being great value so they want to hang onto them. This is just plain wrong. The zero ECB interest rate is not something we are going back to – that was a once in a 100 years event. Normal interest rates are more 3/5%. This is the level they are going to remain. Inflation is not going away. It will not magically drop to 2% this year.

So what can I do ? If you are on a tracker mortgage (or even a variable rate mortgage) you should give us a call and run through your options. We can provide the monthly repayments for a new fixed rate, walk you through the switching mortgage process and advise on any other questions you might have. Now is the time to change. Fixed rates are still at good value – anything with a 3% is good – but this wont last long. We predict that even the best priced fixed rates could be close to 5% by summer 2023. So now is the time to take action.

Call us now.