Should we bail out fixed rate mortgage holders? I don’t think so!
I’ve been reading some coverage recently, including more yesterday, about people on fixed interest mortgages and how they’re feeling the pinch these days now more than most. With falling interest rates, those who have tied in their mortgage for a period of time at a fixed rate are not getting the same benefit that those on variable or tracker mortgages might be.
One of the recent newspaper coverage, Fixed rate loan holders ‘abandoned’ in the Irish Independent, quotes James Doorley of the Consumers Association of Ireland. In very emotive terms, Mr. Doorley “accused the Government of abandoning people stuck with uncompetitive fixed rates.”
A more considered view on the topic was published by the financial broker Liam Ferguson on his blog last week where he questioned whether the stiff fees that those on fixed rate mortgages are charged if they wish to break free from their contract and change to a variable mortgage (since trackers are no longer available).
But on this issue, I feel there is some merit in a proposal for a once-off amnesty where owner-occupier mortgage-holders get a brief “window” of time to break out of a fixed rate entered into prior to October 2008 without penalty.
However, both Mr. Ferguson and Mr. Doorley acknowledged that those on fixed rate mortgages had signed contracts and would have been fully aware of the implications of entering into such fixed rate deals at the time.
To add my 2c worth, I don’t believe that any leeway should be provided to those on fixed rate mortgages for precisely that reason – they’ve signed into contracts. No more than the banks or the property developers should be bailed out of their problems either. If you sign up for a contract with your eyes open, it’s not right that you should be bailed out – no matter who you are.
Referring to banks being bailed out and using that as a precedence for bailing out home owners, as advocated by Mr. Doorley, is an extremely dangerous suggestion and hints that we proceed down the road of two wrongs making a right when it comes to the dire financial affairs that we’re in at the moment.
I would hazard a guess that many of those who entered into fixed rate mortgages in the past number of years did so on the basis that such mortgages provided a discount on repayments for the first couple of years. If it were not for this discount, those mortgages that should really have been unaffordable were made affordable.
Many of us will be familiar with the bankers speil of “well, you can’t really afford mortgage x, but if you get the fixed rate with a discount for the first couple of years, when things get better, you’ll be able to switch to something more affordable”.
This is essentially some evidence of what we’re told got the country into the position it’s in now – irresponsible lending. Just because it’s irresponsible in favour of home owners rather than developers doesn’t make it any irresponsible.
But really, such an approach was a gamble on things getting better, which obviously we’re finding that they’re not going to for some time to come. None of us who weren’t lucky enough to bet on Mon Mome at 100/1 in the recent Grand National got our losing bets back, so why should people who bet on what the banks told them when taking out a mortgage get such special treatment? Just because they were irresponsible enough to gamble with bigger stakes?
Definitely not!
23 Comments
There’s an ongoing debate on this subject on Askaboutmoney.com here.
http://www.askaboutmoney.com/showthread.php?t=109826
The majority of the posts are against the suggestion by me and others in favour of a once-off amnesty.
Regards, Liam
Would a one off amnesty also apply for everyone. When inflation in Germany spikes next year and the ECB respond by ramping interest rates to double digits can the people now on variable and tracker mortgages then use their amnesty card to choose to get a fixed rate at 2009 levels?
Also if it is a one off amnesty what gurantee will we have that the same people won’t start another lobby group in 2010 to get the government to force banks to return them to their fixed rate contracts?
once off amnestys tend to be repeated – look at the history of tax amnestys in ireland!
You can’t bail out people who make bad decisions even though it may have seemed a good decision at the time. C’est la vie!
I particularly enjoyed this comment from someone on that AskAboutMoney.com thread. They seem to want to start a political campaign to get their fixed rate mortgages suspended. Good luck with that then.
“I was however, shocked and disappointed to read some of the comments from those that feel that I should not get out of my fixed rate mortgage. You are all certainly entitled to your opinion but sadly there was a nasty whiff of Irish begrudgery laced through many of those posts. There is even a smugness about many of the comments suggesting that I deserve the pain that my fixed rate mortgage brings upon me. Some even boast about the prized position of their own mortgage arrangement. Enough said.”
A contract is a contract. There would be uproar if the banks broke a contract in the other direction.
Plus, it would weaken the banks even more requiring more recapitalising.
As someone who couldn’t afford to buy a house, I despair that I will be bailing out those who did buy for years to come. No-one helped me out a few years ago when I lost money in shares and in business.
Take your losses and shut up.
Have to agree with you, and it’s something I’ve thought for a while (Ray D’Arcy has been running with this on and off over the last few days). When you enter into a fixed-rate mortgage, essentially you’re getting the security of knowing exactly what your repayments will be over the (2, 3- or 5-year) period. For that security, you’re taking the risk that current lending rates could go up or down, but that’s the gamble you make.
Imagine it in reverse (these are just sample rates, by the way, nto based on anyone or any particular time). A lender took a variable-rate mortgage at a rate of 4% in year 1, when 3-year fixed rate mortgages were at 5.5%. In year 2 his variable-rate mortgage has risen to 6%, so he tries to fix his mortgage, but now the fixed-rate mortgage is 7.25%. Imagine him now going to his bank and demanding to get a fixed-rate mortgage at the year 1 rate, because otherwise he’d be “stuck with uncompetitive variable rates.” It doesn;t make sense, and wouldn’t happen, would it?
I acknowledge most of the points above, though I’m unclear who Paul is directing his “Take your losses and shut up” comment at. (Personally, I have a tracker variable mortgage.)
What galls me is that the banks made bad decisions (with hindsight) on many of their larger loans, which caused them financial strain. They have got assistance from the taxpayer. If their lending decisions had gone the other way, they would have made huge profits on these loans.
A once-off amnesty in this instance would cost less and would benefit those who are struggling with repayments.
Would some form of qualifying criteria make it more palatable, e.g. PDH only, evidence that repayments are >X% of net household income?
What about savers who are getting crucfied by low rates? Can they get their old rates back as well?
I don’t think so!
A fair point Tom, but how many savers do you think are struggling to put food on the table because they’re not getting sufficient interest on their deposits?
I fixed last year. I’ve fixed all through my ortgage. I did it in the knowledge that I would have a max-rate to pay so if rates went ballistic ( iremember seeing those days of the 17-20% rates)I’d be covered. The premium for this (insurance) was the fact that if rates went low then I’d loose out.
We can’t all blame soneone else for our problems when our bets turn out the wrong way – this is like the great fiasco when there were calls to compensate eircom shareholders.
Surely, an amnesty like this would result in an increase in variable mortgage rates (non tracker).
Would the variable rate mortgage holders not end up ’subsidising’ those that opted for fixed rates?
Totally agree that a one off amnesty would help most households who are struggling with recent redundancies, higher taxes and/or pay cuts. Coming from a banking background most people who favor fixed mortgages are cautious people who are trying to keep a roof over their families head. In recent years they have been the ones who have had to over extend to have a home for the families while the developers continue to live like fat cats!
If you are worrying about interest rate on savings then I don’t think you are really in the same boat as many of these people who are struggling with outgoings far exceeding incomings.
I do hope there is some relief offered to fixed rate home owners to ease the financial burden.
By the way those lower fixed rate deals are usually only for a period of a year….
I personally never heard that fixed rates were cheaper- the ones presented to me were always slightly more expensive than the tracker or variable- paying extra for the peace of mind. However, one important point seems to be missed by many people. Yes, I signed up for my fixed rate knowing that if rates fell I’d be paying more. I was fine with that. What I never expected was for my wages to decrease by €280 a month which is what has happened to me. I signed up for a fixed rate mortgage, with my secure job, feeling that I could afford the extra. Now my wages have dropped so dramatically, I’m in a really bad situation. Extraordinary times call for extraordinary measures.
Well its not that simple [ contract law], have you ever asked the bank for a sample costing at the loan offer stage for a redemption. They will not provide this to you, nor will they state expressly that you are liable for a penalty but merely print in on every other page (in small writing, at the bottom or the back of the documents).
I think people would have taken a different decision if the banks had not been so vague.I have helped a few people to wrangle out of fixed penalties, the T&Cs were too vague and the documentation was incomplete, which is just sloppy by the bank but then again who was regulating The spirit of piece is distasteful in that it really says F&CK those who suffer on fixed rates. An attitude which is one of the reasons why we are in the mess we are in. But forward thinking people would realise that fixed rate penalties if waived , would enhance the spending power of those who benefit and in turn the economy. Hell it may even create a few more jobs , I suppose we should also ban the new simpler english for financial instruments , sure if the average Joe gets burned well so what.It will only take a few cases which I believe are on the way to landslide the misrepresentative selling of mortgages by banks to consumers. It reminds me of the guy who went into a strip club in London and ordered a coke, they brought the coke and he drank two bottles and enjoyed some viewing. When the bill came they charged him £250 a bottle but as the author says.
“Just because it’s irresponsible in favour of home owners rather than developers doesn’t make it any irresponsible.” – How can one argue with that logic(hmmmmm).
The use & abuse of the ambiguous redemption fee has had its day , ambiguous terms in a contract for debt are about as useful as tits on a bull.
OH MY GOD!!! it’s ok for us as taxpayers to be forced to bail out the government and banks that made bad financial decisions over the past 8 years but its not ok to ask that they now return the favour and allow everyone to be on a variable mortgage rate until such time as the economy steadys itself again. Was any normal Jo Soap aware that this crisis was going to occur? NO, but the banks did and we STILL have to go and bail them out!…. I would have at least thought that people would have been sympathetic to those who fixed in early 2008 on the assumption that rates have been climbing for years and allowing them to know at least what the repayments are going to be fluidly for x amount of years. There was no underlying intention into the regular person fixing – just ill advise. But then who was to know……
i fixed last october @5.2 for two years,was told by a friend to read my contract about breaking my fixed rate and it says i may be hit with a penalty,this can also mean i may not!!!!!!!!!!!!i was quoted 10,300euro to get out i nearly shit myself,what im hearing is that its six months interest payments to get out,again says nothing in my contract about this,can anyone offer any help as baby on the way, so soon only one wage coming in,i understand people sayin tuff shit they had to pay when rates were rising,but people were not losin their jobs
You make the stupid comment of “I would hazard a guess that many of those who entered into fixed rate mortgages in the past number of years did so on the basis that such mortgages provided a discount on repayments for the first couple of years. If it were not for this discount, those mortgages that should really have been unaffordable were made affordable” I took out a fixed rate about 8months ago and it WAS NOT at any discount it actually cost me 22EURO more than the variable at the time,i did this because my bank, which i wont name, Told me normally the rate never drops by more than 1%. I was happy to pay the bit more so i could make sure i could pay. I did a budget and getting it fixed even paying 22EURO left enough to pay. With cuts to my wages im now down 190EURO a month and thats just the start. If the banks didnt use dirty back hand tactics to make it look like they were in good shape, i wouldnt have been cut in my wages and i would be happy to pay my fixed rate even if the rate still dropped to what it is now. So dont have such a blinkered few that every should be left to pay a fixed. Some of us wont to but just cant afford it
@Carl – I did say it was a guess.
I appreciate the difficulty you’re finding yourself in at the moment, but banks were obliged to stress test any loans. Technically, as far as I’m aware this should look at your ability to pay no matter what the situation is – change in interest rates or change in earning capability.
As far as you taking and following the advice from your bank, if you feel your were mis-advised, then you should take your case to the Financial Services Ombudsman.
After reading some of the posts here. I understand why some are saying you signed the fixed rate contract, you are still paying the same as you were previously before the rated went down. Fair enough, but I like many others have taken a cut in pay in recent times, more government taxes. Therefore not earning as much as I was when I fixed in the first place. Surely this must be taken into account when looking to get out of your fixed or been allowed to fix at a lower rate without huge penalties. If my pay was still the same I’d have no problems sticking to the contract I originally signed.
“What galls me is that the banks made bad decisions (with hindsight) on many of their larger loans, which caused them financial strain.”
You mean such as giving out 100% mortgage at the height of the bubble, something you considered an “excellent idea”?
http://archives.tcm.ie/businesspost/2005/07/31/story6719.asp
P.
@Aisling – One of the responsibilities of the banks was to stress test the ability of their customers to make repayments. This was supposed to include what would happen if interest rates went up – and if income went down.
I have a hard time swallowing the idea that the people made bad decisions. The truth is that a lot of Americans were seeing the dream of owning a home slipping away, the average American only make between 10.000 to 50.000 a year so when you say that, you are saying that the average Hard working person did not deserve to buy a home, It wasn’t their fault that the fat cats thought it would stimulate the economy by driving up cost of housing and living then only offering sub-prime lending for people in that wage earning range, promising that wages would rise as well as their equity so in a few years they could afford a home, then turn around and start outsourcing jobs over seas. what part of that is the American people fault?
@Dana – many thanks for your comment.
I think your own post has highlighted where I see the issue here, and why to a greater extent, consumers themselves are to blame.
You talk about people earning between 10 and 50k “deserving” a home.
Deserving a home has nothing to do with anything here as far as I’m concerned – if you’re earning whatever amount of money and you can’t AFFORD a home, then you shouldn’t be entering into borrowing agreements (or be allowed to) where one is borrowing many multiples of an insufficient salary.
If there wasn’t a demand for such products from consumers, then banks wouldn’t have provided them.
Fair enough, banks created a demand by making them available, but if consumers really were responsible when looking at these products, they should actually have said no, rather than taking the cash.
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[...] News Sources wrote an interesting post today onHere’s a quick excerptI’ve been reading some coverage recently, including more yesterday , about people on fixed interest mortgages and how they’re feeling the pinch these days now more than most. With falling interest rates, those who have tied in their mortgage for a period of time at a fixed rate are not getting the same benefit that those on variable or tracker mortgages might be. One of the recent newspaper coverage, Fixed rate loan holders ‘abandoned’ in the Irish Independent , quotes James Doorley of the C [...]