Long term fixed interest rates - a possibility?

I saw on another thread this week fixed rates 20 to 30 year periods. That was France:

Fixed 20 years: 3.30%
Fixed 30 years: 4.20%

Any chance Irish banks would bring in similar products?

Most I’ve ever seen is 10 years fixed in Ireland and these are usually expensive.

I know the usual comment of Irish banks are broke and need high SVRs to make some cash.

I’m more thinking medium to long term outlook here once the country and banks turn a corner.

With their experience of the ‘tracker’, there is no way in hell an Irish bank is going to lock itself into any form of fixed, long-term commitment.

They need variables to attract people in a low rates, then jack them up a short time later to improve profitability.

Even 10 years from now, the taste left over from the tracker debacle will ensure a serious aversion to locking rates.

IMHO That taste, it’s not the tracker mortgage problem per se, it’s the failure of the bank to run it’s business in a sustainable or sensible way. Tracker issue is just tracking the moronic index of the bank.

Indeed. The problem is not tracker mortgages. The problem is trackers with too low a margin above ECB. As discussed on another thread, it’s only a matter of time befor some bank offers trackers again, at ECB+a few points this time. That would be attractive.

Euribor mortgage more like, as in most of Eurozone

I recall sentiments here and Ireland generally that a “Fixed rate was stupid/pointless” as the bank would be better able to “predict” the average interest rate over 5 years; people don’t realise than it should be about margin and that the fixed mortgage rate should then relate to the rate at which a bank can issue 5 year bonds.

I’d also wager than those who borrow for fixed terms are more prudent (so the default rate is lower), at least that was the case in the bubble

If a large amount of people wanted long term fixed mortgages, the banks who borrow, monthly at Euribor or whatever it is, could just enter into an Interest Rate Swap, and swap the monthly libor cost that they have for the next xx years, for a fixed rate. This is a very common transaction, one which they do already on the markets for shorter durations.

The problem I see with this is 1) will there be enough demand for the Bank to be able to put on a derivative. There probably isn’t much point in putting it on for a small amount of loans.

And 2) what happens if one of those loans defaults? Over a long duration, there is a serious break cost.

Back when we had punts, there was no Punt swap rate, so the banks had to swap the interest rate risk with the Central bank. With Euribor, there is a massive swap market out there to trade on.

Any chance of new market entrants from abroad that can borrow at lower rates than Irish banks currently can?

The thought did cross my mind.
At some point, there has to be an opportunity for a foreign bank to enter the market when property prices are low and the domestic banks still lack the cash to lend.

Any bank offering sub 4% fixed loans could clean up.

Just thought about it recently. Plenty people here seem to have enough cash for low LTV but are still offered usurious rates from the usual clowns

Was just thinking about this the other day, but while I’m aware of what such a swap is I’ve no idea about availablity or practicallity from the bansk point of view

I always assumed with trackers that the bank had hedged somehow. It was only when the tide went out I realised they were swimming naked. Could trackers that are hedged work rather than the naked positions our glorious banks took?

I’ve long said that when this happens it will be my sit up and take notice we might be at the bottom moment. If we’re at the bottom why aren’t foreign banks without legacy issues from the bubble (I’ve long since given up calling most of that period a “boom”) setting up shop

Thing is, even at the bootom, can this happen as long as mortages are supposedly secured on an asset but in reality the bank can’t (or won’t) foreclose on this secured asset

I agree. Serious potential out there

This is spot on Renting and Proud. The foreclosure legislation is preventing this from happening at the moment, even in the commercial space. Things will have to change but it may take a while yet. Although this piece is just an ad it is a decent read.

accountingnet.ie/recession_r … anking.php

(some snipets)
The Irish Banking system is now experiencing a period of unprecedented change as financial institutions enter into the Deleveraging Phase. This part of the credit cycle will have a number of profound implications for all borrowers, and the probable outcome is that most professional property borrowers will not be dealing with their current financial institution within a two year period.

From our internal analysis, the banking system over the next seven years has an overall deleveraging requirement of approximately €235bn, or on average €33.5bn per year. To put this into context, only €35bn of deleveraging has been achieved in total since the peak of the market in 2008. This clearly highlights that both the pace and quantum of this change can only increase from this point onwards.

The Banks have sold the ‘low hanging fruit’, consisting of prime international property assets, profitable businesses and the performing overseas loan books. The effect of this to date on the domestic market and the domestic borrower has been negligible.

Whilst the level of indebtedness remains the same, our experience is that the new lenders will be pragmatic in settling the debt at a figure that yields a satisfactory return on their capital within a defined timeframe. The new owner of the debt will be an experienced and battle hardened corporate professional with whom borrowers are unlikely to be dealing with beyond a three year timeframe. They will not procrastinate, get involved in red tape, or make decisions other than on purely financial or commercial grounds.

You don’t need to hedge a tracker if you’re a bank, assuming that your margin is not expected to rise. Bank borrows money at ECB + (small margin) and lends at ECB + (larger margin). Nothing wrong with that in theory. Banks made two errors:

  1. They assumed they would remain a decent credit risk, ie no catastrophic market events that would vastly increase their borrowing margin. This is probably not a terrible assumption, most of the time.

  2. More importantly, from what I understand they made loans that were always loss-making or possibly just about breaking even. They never expected the trackers to be held for the full term, since most of the mortgages were expected to be flipped, plus they expected to make other money for their customers.

The strategy appears to have been:

1: Make loss-making loan
2: ???
3: Profit!

+1 The latest CB Q3 arrears and repossessions report is due out this week or next.

If you look here for the Q2 situation viewtopic.php?f=10&t=44532&hilit=arrears+repossessions&start=45

Those stats show only 1 in 400 residential mortgages are respossessed on foot of court order.

Exactly the theory was sound. But the banks at the time probably didn’t borrow from the ECB, they probably borrowed from somewhere else, at lower rates. That somewhere else was the money markets which were a wash with free and easy money. So they collected a margin difference between what they were charging, ie the ECB rate, and what costs they were facing, ie the money markets. The money markets didn’t want anything to do with bad credits, and stopped financing the Irish banks.

And then the tracker banks got squeezed. ECB rates went down, QE…, so the contracted rate in the trackers had to go down. The Irish banks were forced to borrow the expensive money at ECB and CBI rates, and the margin that they were making, was supposed to cover the defaults. But obviously that won’t happen now.

But the theory was right, just they got greedy. They normally borrow from Euribor money markets, so they should have linked against this. I am more familiar with USD Libor markets. But the concept is the same.

The strategy was this.

1: Make loans, regardless of how the risk was hedged
2: Get funding from the money markets to generate short term gains, even if it wasn’t hedged exactly
3: Get sales commission, bonuses, for giving everyone what they wanted.

And everyone got what they wanted. There was lots of business activity, profits looked good, commission and bonuses flowed on the back of good stock market reaction, pension funds bought up shares, stock markets looked for banks where there was an expansion of activity, and everyone bought into the hype.

The problem as I see it, is that those who managed the risk in the banks still get to keep their bonuses, their pensions and probably their jobs.

The reaction to what has happened is that those in banks should have their bonuses, commissions tied to the long term profit of the banks, instead of quarterly/annual profits. That would ensure those tied to managing the risk of the banks, do their job, and don’t get forced into taking cheap short term money, and using it to take long term risk. You can’t do real business, without taking risk, but you have to manage that risk, and price it accordingly.

Thanks macannrb, that’s a much better explanation!

that is why no lessons are learned. In a normal business if you are reckless and mess up your business folds, you lose your job. Because banks were bailed out then that normal business lesson is not learned in a painful way i.e. run your business properly or lose your job.