two tier interest rate?

[moneygrower]

Hi, I was talking to a man who's been around the block a bit longer than me about selling up, renting and waiting for prices to come down. He said that in 1979/80 when prices came down the banks introduced a two tier interest rate system whereby if you already owned your house your interest rate went up slightly but if you were buying into the newly slumped market you paid a much higher interest rate if on a cheaper house. So I guess the buyer in 1980 was carrying the can for the person who bought in 1979 and now had negative equity.Don't know if I've explained this clearly but I wondering what ye think the likely hood is off this happening again. Will the ECB setting our interest rates rule this out, or the new competition in the banking market, or will the banks make sure they get a nice cut one way or the other?

 

[ClubMan]

Will the ECB setting our interest rates rule this out, or the new competition in the banking market, or will the banks make sure they get a nice cut one way or the other?

No. The ECB rate is simply a wholesale rate. Lending institions normally charge retail rates that include a margin over and above the wholesale rate. Lenders can (up to certain limits I believe) basically charge whatever margin over and above the ECB that they choose and that the market will bear. They can and do charge different margins above the ECB to different categories of customers (e.g. buy to let, certain mortgage amounts, certain LTV ratios etc.).

 

[oysterman]

In any event, there's already a lot of cross-subsidisation in the mortgage market. If you're the sort of borrower who is as good as certain never to miss a payment your rate of interest is higher than it should be - you are paying for the risk and the costs associated with delinquent (and potentially delinquent) borrowers.

The development of a sub-prime mortgage market in this country should go some way towards eradicating this distortion in the market but there is a long way to go.

One of the UK papers last weekend mentioned in passing a tracker mortgage with a lifetime rate of Base Rate +0.19%. This takes a bit of the shine off NIB's market leader +0.79% in Ireland.

What might be termed the "Community Rating Culture" is firmly entrenched in Ireland but it would be interesting to see the market reaction to a financial institution that was really prepared to segment the market and price accordingly.

I wonder what the reaction of our friends in Dame Street would be?

 

[ClubMan]

I hear ya oysterman. Similarly many existing mortgage borrowers subsidise the cost of early years discounted rates for new customers, many CU members foot the bill of the significant bad debts racked up by less prudent fellow members (not to mention money wasted by the CUs/ILCU themselves on failed IT systems and consultants) and so on. To be fair though at least some institutions have entered the market in recent years and cherry picked their customers leading to better efficiency, and value for some (e.g. those with low LTVs, certain levels of money to put on deposit etc.) not to mention ICB profiles being used to identify potentially high risk borrowers.