Ulster Bank offset mortgage holders to receive compensation next year in return for losing facility

4,500 remaining Ulster Bank customers with offset mortgages are to lose the offsetting facility on their loans in the middle of next year.

But the borrowers are also set to receive thousands of euro in compensation in January for the change.

They will also retain the tracker element of their mortgages as well as the "pay and redraw" feature, which also enables them to reduce interest payments.

However, their loans look set to be sold to another bank, fund or credit servicing firm next year, as part of the wider process being put in place.

They will not lose their tracker mortgage and the "pay and redraw" facility as part of that sale.

The move will resolve one of the last remaining stumbling blocks facing the bank as it gradually withdraws from the Republic of Ireland market.

The lender is to write to all affected customers from today, to outline how the process will work.

It is understood that the Central Bank is aware of the bank's plans.

"I would like to thank all our customers who have an offset mortgage for their patience as we worked for a long-term solution as part of our phased withdrawal from the Republic of Ireland," said Ulster Bank Chief Executive Jane Howard.

"The arrangement we have now put in place brings certainty for these customers, it retains as much of the product as possible, in particular the Pay and Redraw feature which reduces interest paid on the mortgage, while recognising the removal of the offsetting feature."

"The solution also takes into account the future value of the product because this product is no longer available in the market."

Offset mortgages are effectively tracker mortgages with additional features that are linked to current and/or deposit accounts.

While the interest rate tracks the ECB rate with a set 1.15% margin, the offsetting facility allows the customer to reduce their mortgage interest in two ways.

They can use funds in a current and/or savings account to reduce their loan balance, thereby resulting in them paying less interest.

The borrower can also move money they have on deposit into their mortgage account to reduce the balance and interest, but they can also pull back or withdraw the funds up to a limit if they need them.

Ulster Bank had tried to find a solution that would see this €477m portfolio of offset mortgages moved or sold to another provider, while retaining all the features, in a way similar to how the bank has sold its other loan books to Permanent TSB and AIB.

However, this wasn’t possible and this has meant that the bank has had to continue to hold onto the loans and manage the customers as it sought a solution.

Now, under a plan announced by Ulster Bank, offset mortgage customers will have the offsetting feature removed from 23 May of next year, although the pay and redraw facility will remain.

The linked current and/or deposit accounts will also have to be closed by customers by that date and if they are not then the bank will close them in June.

It is understood that Ulster Bank is legally entitled to do this, because they are linked to the closure of the related current and savings accounts.

In recognition of customers losing the offset feature and therefore the opportunity to use it over the remaining terms of their loans, Ulster Bank will make ex-gratia payments to each of the 4,500 customers around January 10th of next year.

It will be based on their previous use of offsetting over the past six years and their average offsetting balance over the last two years, as well as what they might have saved in future interest if they were to retain the same offsetting balance until they have cleared their mortgage.

The end figure will then be doubled, in recognition of the possibility that the customer’s offsetting balance might increase unexpectedly in the future, like through the receipt of inheritance or a redundancy payment for example.

Around 68% of the 4,500 customers didn’t use or minimally used their offset feature, Ulster Bank says, but in these cases the bank says it will top up their ex-gratia payment to a minimum of €5,000.

In circumstances where a customer was a heavy user of the offset feature, the maximum amount payable will be the total future mortgage interest payments they would have to pay out to the end of their term.

Every customer will also receive €250 towards the cost of independent financial advice.

Ulster Bank says the average compensation is expected to be around €12,650.

The average term remaining on all outstanding offset mortgages is 11 years and the average balance is around €106,000.

Less than 10% of the loans are non-performing and in such cases, Ulster Bank says the ex-gratia goodwill payment will be used to reduce the arrears.

Any remaining surplus will be paid to the customer, while the €250 payment towards financial advice will be paid directly to the customer and will not be used to clear any arrears.

Where a customer’s arrears balance is €1,000 or less, the full payment will be paid to the customer and will not be applied against the arrears balance, the bank says.

Sinn Féin's finance spokesman, Pearse Doherty, said there should be a clear expectation that when the time comes the mortgages should be sold to mainstream lenders and not vulture funds.

"Ulster Bank have changed the terms of these customers' mortgages," he said.

"It is now incumbent on them to rule out their sale to any vulture fund."

"Today I have written to the CEO of Ulster Bank seeking this assurance."

"This is also an opportunity for the remaining retail banks to show they value the interests of consumers, and recognise the harm done by previous loan sales to vulture funds."