Siobhan McAleer: would worry about naive customers

Banks are trying to wriggle out of existing tracker mortgage deals they made during the property boom by getting customers to renegotiate the now-unprofitable home loans.

Some lenders have been offering to 'buy back' the loans - which guarantee a fixed margin above the European Central Bank rate - by paying customers to refinance onto standard variables or fixed rates, or by providing other incentives for them to pay off the balance, according to several brokers contacted by the Sunday Tribune.

New tracker mortgages were removed from the Irish home loans market over the last two weeks as banks could no longer bridge the funding gap between the unusually high cost of money on the credit markets and the relatively low and inflexible rates promised in tracker agreements

But already-agreed trackers are still on the banks' books - and many are losing money as the current cost of funding far exceeds the amounts customers are paying.

One bank executive admitted his bank was losing money on every tracker mortgage it had written since October 2007, when money market spreads soared above key reference rates.

"This is what's called 'negative margin lending'," said Karl Deeter of Irish Mortgage Brokers. "It's on the more recent 80%-plus loans where they're not getting margin. The bigger the money, the bigger the issue. Cashflow is getting killed."

UK mortgage lender Northern Rock has provided Irish banks with something of a model for this practice.

In an effort to shrink its balance sheet to a more manageable level, the nationalised bank has offered to pay lump sums to customers who refinance with other lenders. It has also removed penalties attached to switching to get people to move.

"The banks are maybe hoping people will be naïve about this," said a senior industry source. "But people can't really move right now. It would only work within institutions."

According to broker sources, one bank has been trying to encourage holders of tracker mortgages onto attractive fixed rate loans. Bank of Ireland has also reportedly contacted customers to renegotiate tracker agreements, but backed off after a negative reaction. The bank did not respond to a request for comment late last Friday. Sources said other banks were testing the waters, too.

"It's no big surprise if the banks try this," said Siobhan McAleer, chief executive of the Mortgage Shop chain. "Uncertainty might drive some tracker customers to fix. I would worry about the naive," she said, adding that tracker customers are in a very favourable position in the current market conditions.