We certainly live in an increasingly “two-tier” society: two-tier health care, two-tier public sector pay and conditions and – unfortunately for AIB (and some other banks’) customers – a two- and even three-tier mortgage market.
From next month, 70,000 AIB standard variable rate mortgage customers – the kind whose interest payments float up or down over the course of their loan – will pay another 0.5% interest with the rate then pegged at 4%.
This is the second 0.5% rise in under three months, though AIB has pointed out that its standard variable rate, at 4%, is still lower than its competitors: at PTSB, the most expensive lender, the rate is 4.67%; at Ulster Bank, 4.5%; and it’s 4.49% at Bank of Ireland.
Mortgage borrowers are certainly not equal, not even within the same bank. At the top are the tracker-rate payers, then fixed-rate ones and at the bottom, the variable-rate payers. Some of them are even luckier than others.
For example, if you bought your house during the late 1980s, the ’90s or early 2000s and always remained on a variable rate, chances are you’ve seen some pretty high rate peaks and some very low dips, but the size of your loan was probably small enough relative to your earnings to allow you to cope with the swings and roundabouts.
If you bought your house or apartment (or even a second property) during the bubble years, and for some inexplicable reason you didn’t get a cheap tracker mortgage, then any upward change in the standard variable rate is a serious blow.
Typical size mortgages by 2007 were about €250,000 but too many buyers not only had even higher home loans, they also took on unsecured personal loans and maxed out their credit cards. Meanwhile their properties have halved in value and their incomes have plummeted.
Every extra 0.5% hike in a typical variable rate mortgage will cost its owner another €30 for every €100,000 borrowed. The €250,000 mortgage-holder will have to find another €75 from next month if they bank with AIB. This is on top of the extra €75 they had to find when the rate rose by 0.5% in August.
I don’t know any homeowner who would find it easy to hand over another €1,800 a year to a creditor, but such is the nature of the contract they signed – rates can go up at the discretion of the lender (even one that you were forced to bail out and own).
We need a just, credible and comprehensive solution to the problems of huge arrears and negative equity that we already have in this country.
It would be very helpful if the Central Bankers, Banking Federation, the politicians and consumer advocate groups (such as MABS, FLAC, New Beginning and Lifeline) would add another subject to their huge agenda: the introduction of full-term fixed rate loans like those that are available in most other European countries, the US and Canada.
Variable rates have been the loan type of choice (before the brief appearance of trackers) for too many years in Ireland with appalling consequences on more than one occasion: Anyone with a mortgage in the early ’90s during another financial crisis will remember how standard variable rates briefly spiked at over 15% or 16%.
Until long-term fixed rates are introduced (without punitive early redemption penalties) the regretful Celtic Tiger variable rate mortgage holder is going to have to dig a lot deeper in the future to meet their monthly payments.
Those who are already on the brink of arrears shouldn’t wait until that happens: You need to take appropriate action if you are not to fall into a serious debt trap that will not just put your home at risk, but could cause all sorts of other marital, family and work difficulties.
First – and this assumes you haven’t already undertaken a root-and-branch review of your finances – sort out exactly how much money is coming in and going out. Lay out all your income and expenditure in a ledger or an online budget sheet.
If paying the extra €150 a month is simply a matter or cutting back on booze, fags and gym memberships you never use, so be it. But chances are that such obvious discretionary spending is already long gone and you may have to make more fundamental, big-ticket changes (as opposed to dropping them altogether, which is not recommended) to insurance and utility contracts and pension funding.
You may have to make some tough decisions about car ownership, having a family holiday, or how and where the children are educated.
If, however, none of these budget cuts is possible, or enough, then you need to contact your lender and tell them (don’t ask – that doesn’t work) that you are either going to need a lower, sustainable repayment schedule or you are probably going to join the 100,000-plus homeowners who are already in arrears and a very expensive (to them, as well as you) default process.
From the moment you contact the lender, you must log every call, email and letter and you need to record every meeting – bring a tape recorder or mobile phone with you and suggest the bank does the same.
That’s the easy part.
Next week: Consumer advocate David Hall has a plan to restore some sanity to the current mortgage debt fiasco – and to bring some hope to thousands of desperate homeowners.
p.s. I’ll be giving personal finance seminars at the Over-50s Show at the RDS in Dublin this weekend. Eddie Hobbs will be joining me at the Saturday session, which starts at 1.45pm.