Thursday, January 1, 2009

The tracker trap

Sales of houses in Ireland have virtually ground to a standstill. This can be seen by the fact the mortgage debt grew by only €24 million in October and €96 million in November. This compares with an average monthly increase of €850 million between January and September 2008 and monthly increases of over €2 billion during 2006.

A lot of this can be explained by falling house prices as new entrants are waiting for the further anticipated falls. However there is also likely to have been a collapse in those trading up or down. House prices shouldn't have a huge effect on people moving as when prices are high they sell high and buy high and when prices are low they sell low and buy low so there may not be a huge difference in the final net position. Stamp duty is one reason that increases the cost of moving.

Another could be the cost of refinancing. Over the past few years tracker mortgages have been increasingly popular with more the two thirds of new mortgages on tracker rates. These have commonly been set at ECB + 1.0% with some as low as ECB + 0.5%.

If somebody has an existing mortgage at ECB + 0.75% and wishes to move in the current climate they will not be able to get a mortgage at anything close to that rate. There are no tracker mortgages being offered now and most standard variable rates for new mortgages are roughly 2% above the ECB rate. Current rates are available here.

For example a twenty year €300,000 tracker mortgage at ECB +0.75% would have a monthly repayment of about €1,700. If the person moved and again has a twenty year €300,000 but this time on a standard variable rate of 4.5% the monthly repayment is close to €1,900. That is €200 extra a month or €48,000 over the lifetime of the mortgage. That along with a €20,000 stamp duty bill makes moving house a far from attractive option.

The title and idea for this was found here.

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