Analysis: Lessons from Ireland’s ongoing mortgage scandal

A tracker mortgage essentially follows the cash rate set by a central bank. The mortgage provider then puts a margin on top of that. For example, if the RBA cash rate is 1.5 per cent and the bank applies a 2 per cent margin, the borrower would pay 3.5 per cent.

In Australia, tracker mortgages were suggested in late 2016 by the House of Representatives Standing Committee on Economics’ inquiry into the major banks.

The concept of pegging mortgage rates to the cash rate has been suggested by the committee in the past, as they could “protect customers from interest rate fluctuations that are not genuinely caused by changes to the bank’s cost of funds” and “offer customers greater transparency and reassurance by behaving as customers expect variable rate mortgages to behave”.

The suggestion seemed appropriate and timely, given the heavy criticism the banks have faced for hiking rates out of cycle. But the majors ultimately decided against rolling out mortgages that track the RBA cash rate, for a number of reasons. 

However, challenger bank Auswide launched its RBA Rate Tracker home loan in 2016, with a 2.49 per cent margin on the cash rate. In 2017, it was awarded the Most Innovative Mortgage Offering of the Year at the Australian Retail Banking Awards.

But it’s penalties, not awards, that are being handed out over in Ireland where the tracker mortgage has become a $1.5 billion problem.

In 2015, the Central Bank of Ireland decided to carry out an industry-wide review of tracker mortgage accounts after customers began complaining.

“Since 2010, we have been identifying and pursuing some lenders in relation to tracker-related issues. These include borrowers who switched from their tracker rate and/or lost their right to revert to a tracker rate when they came to the end of a fixed rate period on their mortgage,” the bank said.

In December 2015, the Irish central bank wrote to all lenders setting out the framework for a Tracker Mortgage Examination — a full-scale inquiry into the product and its problems.

By March 2018, approximately 37,100 customers had been identified as affected and €459 million ($708 million) has been paid by lenders in redress and compensation with more to follow.

Last month, Central Bank of Ireland governor Philip Lane warned that the cost to Irish lenders is fast approaching the €1 billion mark ($1.5 billion).

So, how did a home loan product pegged to the cash rate and designed to provide stability to borrowers go so wrong?

Following the financial crisis, the European Central Bank (ECB) and many other central banks around the world started lowering their rates. In March 2016, the ECB cut its rate to zero per cent in an effort to revive the European economy.

For those with a tracker mortgage, this meant they were paying rates of around 1 per cent, depending on their bank’s margin.

The problem was, a number of borrowers had been switched out of a tracker and into a fixed rate mortgage, either at the encouragement of the bank or by their own volition. Banks were often reluctant to switch them back to a tracker when the fixed rate term expired.

Irish banking regulators are now on a witch hunt to bring the lenders to justice. The scale of the problem is still being calculated. Irish banks have faced the wrath of the Oireachtas Finance Committee, which has also heard from out-of-pocket borrowers, consumer groups and financial planners.

One of them was Dublin-based mortgage broker and financial planner Padraic Kissane, who helped expose the tracker mortgage scandal. He appeared as a witness on 8 March and his opening statement provided a comprehensive rundown of how many customers from each of Ireland’s banks have been affected.

Interestingly, Mr Kissane appears to have made a business, or at least a campaign, out of the mortgage tracker scandal.

According to his website, the broker is “the foremost expert in the area of tracker mortgages and the restoration of the correct tracker rate for customers of all lenders who were incorrectly taken from their rate.”

He claims to have restored tracker rates and has cases under review with the following lenders: AIB, Bank of Ireland, Ulster Bank, Permanent Tsb, ICS Building Society, First Active, EBS Building Society, Danske Bank, KBC Bank and Bank of Scotland Ireland.

His website also states that Mr Kissane has been “challenging this matter for over seven years which has culminated in the industry-wide central bank investigation” and has been liaising with the central bank as part of its investigation.

[Related: Warning over ‘profit-destructive’ home loan]