Will the bank do a deal on the tracker mortgage if I switch to an adjustable rate loan?
I have a tracker mortgage of €100,000 and an adjustable rate mortgage of €80,000. I was recently left €150,000 in my father’s will. I want to use these funds to reduce my mortgage.
What’s the best way to do this? Could I negotiate exchanging the tracker for a floating rate to reduce the outstanding amount on the tracker loan and then pay off both loans in full?
Mr. GA, email
There is a bit of ambition here, but I think you overestimate the bank’s willingness to consider such deals. At least your father’s legacy has left you lucky enough to make choices.
You have a €180,000 mortgage on your property, most of which is on your tracker. This would not be an uncommon feature of the Irish property market and would have been fairly common among those who had tracker mortgages on their homes and then traded in the last days of the Celtic Tiger or after.
Banks stopped offering trackers, but buyers were often allowed to transfer their tracker mortgage loan to their new home — even if it sometimes increased the margin over the ECB interest rate. The balance would be offset by a separate fixed or variable rate mortgage.
Now, with that inheritance, you’ve decided that you want the peace of mind that your home is almost mortgage free.
The obvious first step is to pay off the most expensive loan first. This is inevitably the adjustable rate loan and that is what you should tackle first. But you have a more ambitious approach.
You want to approach the bank with an offer to convert your tracker loan into an adjustable rate loan as long as they reduce the balance by $30,000. You then want to show up about a day later to fully pay off your remaining reduced mortgage with the amount you received in your inheritance.
It’s a cunning plan, but I can’t imagine it working.
reluctance of the bank
First, banks are very slow to write off debt. Unless they worry that the alternative is that you just can’t pay back the loan at all and they’re on the brink for more than that $30,000, there’s no reason for them to think about it.
And as I understand it, nothing in your personal or professional finances will indicate that you are approaching this position. This is something you don’t want to do because you don’t have any other financial flexibility; on the contrary, you simply want to make the best possible use of the increased financial flexibility that this inheritance offers you.
From the bank’s perspective, the bank probably wouldn’t recoup the $30,000 discount due to the difference between tracker rates and the best floating rates currently on offer – about 1.5 percentage points – on a net income basis even if your mortgage had expired 20 years from now . And they will crack the numbers.
Second, the dumbest loan officer will always ring alarm bells when a customer comes up with an offer to voluntarily switch to a more expensive loan for no apparent reason. And loan officers are usually pretty smart. You should be able to explain to them why such a step makes sense from your point of view.
And of course it doesn’t.
Ireland’s banks are currently paying a high price, financially and in terms of reputational damage, for their behavior during the tracker mortgage crisis, when they effectively refused access to tracker loans to which they were entitled or charged more interest than they should.
In this climate, the idea of a bank entering into an agreement they know to be to the detriment of the customer, with the prospect of regulatory scrutiny down the line, is fanciful.
The only reason to do this is to lower the loan enough so that you can pay it off in lump sum with your existing financial resources. The bank will suspect this – as this is the only reasonable interpretation.
And it certainly won’t be willing to give a $30,000 rebate in anticipation of higher loan interest payments over the projected life of the loan if it suspects it might not benefit from such an arrangement because you intend to pay the entire sum to pay off immediately.
Of course, there is nothing wrong with approaching the bank with such a suggestion. I highly doubt they would consider it given the regulatory concerns. Even if they did, any discount they give you would probably only be small.
That leaves you with the more prosaic option of paying off the more expensive variable loan in full and using the balance to cancel $70,000 off the existing tracker loan.
For what it’s worth, if you’re really determined to pay off the mortgage, the best way to do it as quickly as possible is to continue making the monthly payments at the existing interest rate. With only €30,000 left on the loan, that speeds the point at which you are mortgage-free.
The alternative is to reduce your monthly mortgage payments so that the loan runs for the full planned term of 20 or 30 years and you have significantly more disposable income each month.
I strongly discourage this second approach unless you are currently under significant financial stress. It means you’re paying a lot more interest on the loan than you have to, and of course it means the mortgage is hanging in your debit column for a significantly longer time. It seems contrary to your stated intention to get rid of this loan as soon as possible.
In any case, after paying off the €150,000, you need to review the bank’s default position regarding the continued repayment of this mortgage. I wouldn’t be surprised if the standard is simply to lower payments and continue full term. In this case, you need to step in and tell the bank that you want to continue making monthly payments at the current rate.
Do this in writing. As regular readers of this column will know, my urgent advice is that you should always confirm any interaction with your bank in writing.
Oh, and before you do anything with the mortgage, make sure you’ve used your increased funds to pay off other expensive debts first — like credit cards, overdrafts, or personal loans.
Please send your questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected] This column is a reader service and does not replace professional advice