Is a 40% write off enough to give up your tracker?

Liam Croke

Reporter:

Liam Croke

Is a 40% write off enough to give up your tracker?

Thinking of switching your tracker in exchange for a discount? Read on...

IT was reported last week that a vulture fund which bought about 2,000 tracker mortgages from Bank of Scotland (Ireland) back in 2012, is offering a discount of 40% on the amount owed to them if those same tracker mortgage holders move their loan to another provider.

The vulture fund in question is called Tanager, and is part of a US private equity firm. And when a vulture fund buys a bunch of mortgages, especially ones deemed to be in distress i.e. in arrears, they buy them at a heavy discount – it could be as much as 80% or 90% so when you see them offering 40% write offs, they are still making a very healthy profit.

If they bought a €250,000 mortgage at a discount of 80% i.e. €50,000, and sell the same mortgage for €150,000 (40% discount) they are still making a 200% return.

This offer shouldn’t really come as a surprise, because when a vulture fund buys any sort of distressed debt at a discount, they have an exit strategy in mind right from the get go, and that is to get rid of it, typically within a seven year period from the date they acquired it. And because there are c. 90,000 mortgages held by vulture funds in Ireland, it is expected that this offer won’t be the last and other mortgages held by other vulture funds will follow suit.

So, if you were one of those who received a letter from Tanager or if a letter arrives in your post at some stage this year, and your “lender” is offering you a discount of 40% on the amount you owe if you move it to another lender, should you take them up on their offer?

Being offered a sizeable discount, is of course very tempting, but you have to weigh up the short term benefits of receiving it against the long term loss of your tracker, because moving to a variable or fixed rate could be at best 7.5 times bigger than what you are currently paying.

OK, so let’s look at the numbers and see if it makes sense, and if the 40% discount is enough, because we have to figure out, is it better to have a higher mortgage with a lower rate than a lower one with a higher rate?

Let’s assume you owe €250,000, which you took out initially over a 35 year term and you are 10 years into this mortgage. Your present monthly repayment, based upon a tracker rate of say, 0.85%, is €781. That’s the first number we need to remember.

If you held on to this mortgage over the 35 year term, and the average rate of interest charged over that term was say 1.50%, the amount of interest you would end up repaying would be €71,494 – this is the second number we need to know.

Now, the vulture fund comes in and the balance outstanding on your mortgage should now be approximately €185,000, if you had been making interest and capital repayments. They offer you a 40% discount of €74,000 if someone will take on a mortgage of €111,000 for you. And if, for arguments sake, a new lender did take you, and they charged you a rate 3.5%, the following will happen: Monthly repayments will become €556 assuming you keep the term remaining at 25 years; and total interest payments made over the remaining 25 years will be c. €55,707.

Two things stand out for me in this instance, first your monthly repayments will reduce by €225 (that’s a 29% decrease from what you had been paying) and secondly the total amount of interest you will have paid having a 10 year tracker mortgage and 25 year variable one will be about €91,779, which is €20,285 more than you would have paid if you just had a 35 year tracker. So, is it worth paying €20,285 more in interest payments if you switched, for a reduction in your monthly repayment by €225?

Bet your life it is.

If you saved the €225 and put it into a savings account that just matched inflation, in 25 years’ time, it will be worth €67,500 (€225 x 12 x 25) which is 3.3 times’ more than the extra amount of interest you end up paying on the mortgage. If you earned 2% above the inflation rate, on those savings each year, the difference is even bigger, you would have c. 4.3 times’ more.

And, what about this - if you saved the €225 into a pension fund, it would be like saving €375 each month after tax relief is taken into account, so you can make that €225 stretch even further.

Of course the figures I have outlined will vary depending on the amount you owe, the term remaining, the value of your property, the new interest charged etc. but a 40% reduction in the amount you owe, would suggest to me that it is an excellent offer and one that you should give serious thought to. And the initial reaction to giving up a tracker mortgage from you and from those close to you may be “are you mad to be giving up your tracker”? but, the numbers in the example I outlined would suggest you would be mad if you didn’t, but the key is that you have to make use of those savings. And if you can’t and your motivation to move is to take advantage of lower monthly repayments to balance out what your outgoings are, then that’s fine, your short term needs simply outweigh the long term benefits of doing something with the difference, that’s all.

Everyone’s situation will be different, so it is important you get advice, crunch the numbers and apply them to your situation. What impact will it have on your monthly budget, your long term goals, your quality of life?

And finally, if it all made sense to take the discount being offered, the difficulty I see people having is convincing another lender to take them on. Remember these loans that Tanager took on were distressed loans, which is defined as one where the borrower has financially difficulty repaying it. Does another bank really want to take over someone else’s bad debt when they have to deal with thousands of their own? Probably not, and definitely not, if the mortgage is in arrears.

The one saving grace might be the lower repayments on the mortgage they are being asked to take over. They might be very affordable to the borrower and that lower repayment and hopefully a low loan to value might be enough to convince them to take you on, but I wouldn’t be holding my breath.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie