Why should lenders be obliged to offer existing customers the deals available to new customers?

Discussion in 'The Fair Mortgage Rates Campaign' started by Sarenco, Feb 5, 2017.

  1. Sarenco

    Sarenco Frequent Poster

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    Last edited by a moderator: Feb 5, 2017
    Why?

    We don't prevent any other commercial enterprise from offering incentives to attract new customers so why should mortgage providers be treated as a special case?

    Existing borrowers should be encouraged (and facilitated to the greatest extent possible) to refinance their loans to avail of the very best deals on offer at any given point in time. We shouldn't be trying to reward customer inertia if we want to encourage competition between providers.
     
    Last edited by a moderator: Feb 5, 2017
  2. Brendan Burgess

    Brendan Burgess Founder

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    We have a market where mortgage rates are about 1.5% higher than the average rates in the eurozone. This issue has to be dealt with. I wish that competition and fair treatment of customers would solve the problem, but it hasn't done so. There has to be legislative control.

    If we want to rely on competition to bring down rates, it's essential that competition benefits existing customers as well as new customers

    The lenders use every trick in the book to exploit inertia and to confuse customers.

    KBC does not pass on interest rate cuts to existing customers. As a result of pressure from the Fair Mortgage Rates Campaign, they have now agreed to let existing customers apply for the rates now available to new customers. But this application obliges them to agree that they will not be entitled to any future cuts.

    Again, as a result of pressure, ptsb now allows existing customers to apply for the rates on offer to new customers. But they keep the variable rates artificially high and get customers through 2% cash back.

    BoI does offer existing customers the same rates as new customers, but it too keeps the rates artificially high through cash back.

    But Sarenco, and many others, have asked: Why should lenders be obliged to treat existing customers and new customers the same? It's not required in any other industry.

    I will set out some of the reasons here:

    The mortgage industry is not like any other industry, so it should be regulated differently
    • Mortgages are, in practice, long-term contracts - most other industries are one year contracts
    • Mortgage payments are usually much larger than any other payment such as phone or electricity
    • It's much more difficult to compare a 20 year product than a one year product - so complex pricing and incentives can be used to confuse customers into making bad decisions
    • It is very easy to switch your car insurance or your electricity supplier ; it's not easy to switch your mortgage
      Comparisons are more difficult to make
      A solicitor is needed
      It is time consuming
      Many people can't switch because of a bad credit record or change in circumstances.
    • Many other industries offer time limited deals e.g. a discounted rate for the first 6 months. Mortgage lenders stick the existing customers to higher rates for the full duration of the mortgage

    There are other differences between the mortgage and other markets

    • The Consumer Protection Code obliges lenders to treat customers fairly – there is no such obligation on utility providers.
    • When comparisons are difficult, the borrower will often default to the bank with whom they have their current account. So AIB and Bank of Ireland have almost a captive audience. There is no such tie-in with other industries.
    • Most other industries pass on price increases and reductions to new and existing customers equally.
    Well actually we do. Health insurers must offer any new product to all customers and not just new customers. In fact, we go even further with health insurance, insisting that every insurer must charge the same price to customers irrespective of medical history. That would be like obliging lenders to give everyone who applies for it a mortgage, irrespective of their credit record.
     
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  3. Sarenco

    Sarenco Frequent Poster

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    I fundamentally disagree.

    Sorry Brendan but I don't find your arguments persuasive and I remain strongly of the view that introducing controls of the type you are advocating will discourage badly needed new lenders from entering our mortgage market. In the long run, I believe that it will make a bad situation worse.

    The average floating rate on all outstanding home loans in Ireland is actually pretty much bang in line with the EZ average. Variable rates on new home loans are certainly a lot higher than the EZ average and the primary reason for this is the fact that defaults rates in Ireland are off the chart compared to all other EZ countries.

    If we want lower mortgage rates then addressing our default rates is key. Higher default rates (1) lead to a higher cost of funds; and (2) require banks to set aside additional capital to provide for future defaults. The amount of capital that needs to be set aside for this purpose is primarily determined by historic experience - which is horrendous.

    It is, frankly, disingenuous to discuss mortgage rates while completely ignoring default rates.

    Competition between lenders for new customers will benefit existing borrowers. Existing customers can switch providers to benefit from new offers and lenders will have to react accordingly. I agree that borrowers that are not in a position to switch, for whatever reason, are deserving of a degree of statutory protection but that is another matter.

    Don't think so Brendan - it was obvious to me that KBC changed their business model because they were hemorrahing customers. In other words, market forces worked.

    Taking your arguments for treating mortgages differently from any other product or service in turn:-

    • Mortgages don't have to be long-term commitments and I think we have to get away from this idea and to encourage switching;
    • I don't understand your argument that mortgages should be subject to special treatment because they typically represent large commitments. You could just as easily argue that limiting regulation of mortgages is critical to ensure that the lowest cost possible is achieved given the significance of mortgage payments to a typical family budget;
    • Why is it more difficult to compare the pricing of different loans with different terms? Again, I think we need to move away from the idea of a "mortgage for life" and I don't agree that the pricing of current mortgage products is particularly complex or confusing;
    • If it is difficult to switch providers then surely improving this situation should be the area of policy focus? I agree that providing a degree of protection to borrowers that are not in a position to switch is appropriate. However, that can be achieved without limiting the ability of lenders to compete for new business;
    • Again, there is no obligation to remain with a particular lender for any length of time - if another lender is offering a better deal then a rational borrower should refinance their loan with that lender;
    • There is certainly a regulatory obligation for regulated providers to treat customers fairly but no obligation to treat customers identically;
    • I disagree that mortgage products are particularly difficult to compare or that many borrowers simply default to a bank with whom they already hold an account - that has certainly not been my experience;
    • Many, if not most, industries provide discounts to new customers - nothing unusual about mortgage providers in this regard.
    • Actually health insurers do offer incentives to attract new customers and they do differentiate their products. I don't think you are arguing that lenders should not underwrite loans.
     
  4. gnf_ireland

    gnf_ireland Frequent Poster

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    If you look at the utility market, these offer special deals for one year and then move back to a standard default product. This 'acquisition' promotion is time fixed and then every customer knows what they go back onto. I have no issue with acquisition promotions which are time boxed - for example the PTSB one for 1 year, but ones which last the duration of the home loan allows to negatively target customers for price increases.
    If every customer with KBC who signed up in 2015 was now on the same 'base rate' after their 12 month acquisition promotion had ended, then we might see KBC acting differently towards them.
    I can envisage a time in the near future where KBC increases rates for existing customers to fund lower prices for new customers - and those who cannot move will be in a really bad situation akin to PTSB a number of years ago.

    This does go back to the whole issue of who needs the most legal protection, and whether the objective of the legislation should be to lower mortgage rates or protect those who cannot switch from excessive rates.


    To be fair, most people really struggle with the number of plans available and struggle to find a suitable one for them. I spent a number of weeks last year reviewing them and it was hard work indeed.

    That is fine - but then we would have none of the current banks available as they were all insolvent. We would not have to deal with the issue of previous losses (as they would have been sold off at a huge discount), as would tracker mortgages. The banks would be starting from a clean baseline again and the historical issues would be irrelevant. How often have we heard that the rates need to be high as the banks need to return to financial stability.


    Absolutely agree - in a functioning market. The question is, is the market functioning at the moment !
    And back to what about those who cannot switch??
     
  5. PGF2016

    PGF2016 Frequent Poster

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    Would the banks operate differently if they got fair treatment from their customers? The unfair treatment they get is at the hands of customers who don't pay their mortgages for years yet are able to avoid having their houses repossessed.

    There has to be fair treatment for both sides.

    I do not work for a bank nor do I have any great love for them.
     
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  6. Brendan Burgess

    Brendan Burgess Founder

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    I have been the biggest campaigner for facilitating banks to repossess defaulting mortgages, so you really should not be describing me as disingenuous.

    I have often pointed out that high LTV mortgages should be a bit more expensive in Ireland, because of this difficulty. But 50% LTV mortgages should not be twice the price.

    Brendan
     
  7. gnf_ireland

    gnf_ireland Frequent Poster

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    Absolutely - BUT punishing customers who do pay because others don't is not the answer either

    I don't believe I have heard banks screaming at the Oireachtas committees to allow them go harder on people who are in arrears.

    There is a fundamental issue between cannot pay and won't pay.

    I agree this issue needs to be urgently addressed. We are a decade from the height of the boom and everyone wants to keep kicking it down the road. We will end up with a lost generation at this rate, and we will have serious social issues, especially around pensions, to address is ~20 years time.
     
  8. PGF2016

    PGF2016 Frequent Poster

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    I presume that's for PR reasons. Which bank would want to be the first to say it's too difficult to evict 'honest hard working' people from their homes in the middle of a housing crisis?

    I actually agree with the banks are doing. They have to take care of number one. Someone in government needs to step away from populism and myopia and address the root cause of the issue i.e. make it easier to repossess houses (assuming everyone agrees that is the root cause).

    Not holding out much hope for this however.
     
  9. Sarenco

    Sarenco Frequent Poster

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    Well if a borrower cannot switch to another lender then presumably they are in a different position to a new customer that can avail of the new enhanced deal (i.e. they are less creditworthy for some reason). Wouldn't you expect a lender to differentiate between borrowers on this basis?

    Again, I agree that borrowers that cannot switch are deserving of a degree of statutory protection and I have advocated that we adopt the French model (or a variant of same) to protect such borrowers (rates capped at 133% of the average rate on all outstanding mortgages in the previous quarter).

    Yes, the sheer variety of plans that are available in the health insurance market is certainly challenging. I would argue that this is a direct result of State intervention in the market (community rating) which means that health insurers present a huge variety of different plans as they cannot underwrite individual policies. In other words, policies are deliberately framed for different cohorts as opposed to charging different premiums on similar plans to reflect the risks presented by individual applicants.

    The health insurance market is actually a good example of the distortions that result from State interference in a market.

    No, if a new bank wanted to lend into the Irish market they would still have to provision for defaults on the basis of the Irish historical experience - not the experience of somewhere else.

    Again, that's a different issue that can be addressed without restricting the ability of lenders to compete with each other for new business.
     
  10. jim

    jim Frequent Poster

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    I agree with Sarenco in that I don't see how Banks should be obliged to treat existing and new customers that same. They should have the freedom to run their business how they like (obviously within legal parameters) and then the consumer should decide for themselves who to do business with.

    KBC have acted as per market forces and have adjusted their business model allowing existing customers avail of lower rates if their LTV allows - I think this is reasonable on their part.

    To say that customers are being treated unfairly versus new customers is off the mark.

    The question is: Are customers being treated unfairly? If so, how?

    As an existing customer of a Bank I don't feel like I am being treated unfairly by that Bank. I am paying a rate that I contracted with them - its fair game. They are entitled to try and attract new customers and if I don't get the same favourable treatment I cant now say that I am being treated unfairly just because my rate is not as good as my neighbours rate (the Bank's new customer).
     
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  11. gnf_ireland

    gnf_ireland Frequent Poster

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    I actually beg to disagree here. As part of this process, KBC request new T&C's to be signed. These T&C's clearly state that they wish to differentiate pricing between new and existing customers. They also state they reserve to change the T&C's at their discretion, without the mortgage holders agreement. This is not the behaviour of a bank with the interest in acting fairly.

    Reasonable on their part would be to to pass on all cuts to customers on the same LTV bracket, as per their loan agreement.

    It was reasonable that they allowed customers to change bracket where the LTV allowed. However, this is totally different to treating customers on the same LTV differently

    Note: If KBC had the new clause differentiating between new and existing customers in their original home loan agreements, I would have no issue with the practice - but they did not.
     
  12. gnf_ireland

    gnf_ireland Frequent Poster

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    Absolutely agree on one condition - they clearly specify this in their advertising material and in their home loan agreements.
     
  13. gnf_ireland

    gnf_ireland Frequent Poster

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    It depends on the reason they cannot avail of a new deal. These could include:
    (a) they had a new baby/dependent and the partner took a level of maternity leave or their company did not top-up the salary
    (b) they started a new job, even if paid more money
    (c) if they go self-employed (even at more money) they have to provide 3 years accounts. A lot more people are on contract based employment these days

    These people may not be in any sort of financial difficulty or concern, and may never have been in default or even missed a payment. In fact they could be overpaying regularly.

    But because they simply may fall out of the standard set of rules, banks would not allow them to switch.

    People cannot put their lives on hold forever just to be 'mortgage switch ready' because banks want to offer new customers an incentive and to maintain a fair rate (ie market rate) they always need to switch provider.

    It would be a lot 'fairer' if banks allowed existing customers move to the new offers (without unreasonable restrictions), or else went an offered lifetime fixed rate mortgages so you get the rate you sign up to for the duration





    I think we are all in agreement re borrowers who would cannot switch getting a level of protection. The question now is simply what form that takes.
     
  14. Sarenco

    Sarenco Frequent Poster

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    Last edited: Feb 6, 2017
    Well at least KBC are transparent about the terms of their mortgages.

    If a borrower doesn't like those terms then they are free to take their business elsewhere.

    Whatever way you look at it the borrowers in all those circumstances that you outlined above are less creditworthy than a new customer that can avail of the enhanced terms. It seems entirely reasonable to me that a lender would differentiate between borrowers in these circumstances.

    Again, if another lender offers a better deal - switch! If not, what's the complaint?
     
    Last edited: Feb 6, 2017
  15. gnf_ireland

    gnf_ireland Frequent Poster

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    They are now transparent. They have not been so previously

    You make it sound like switching was as simple as walking into the shop to buy a litre of milk ! Switching is a relatively complex and legal process, which involves the provision of a sizeable amount of credit from an institution. The process itself can take a number of months and involves legal teams etc.

    Based on that principle, no one should ever complain about anything. They should just switch if they don't like what is offered to them.
     
  16. Sarenco

    Sarenco Frequent Poster

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    Re-mortgaging a property really isn't complex from a legal perspective. We have had recent reports on here of borrowers completing a switch, from start to finish, within 5 weeks with minimal effort on their part.

    I certainly agree that it is worth examining whether the switching process could be made even more streamlined and I understand the Central Bank are currently looking at this very point.

    Exactly! That's how free markets are supposed to work - not by State diktat.
     
  17. gnf_ireland

    gnf_ireland Frequent Poster

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    Ok, but are we in a pure 'free market' scenario here?

    Why have the deposit guarantee scheme? Surely that is state intervention? There are lots of examples around where the state 'interferes' - rightly or wrongly !
     
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  18. jim

    jim Frequent Poster

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    Its a very straight forward process and isn't legally complex and should take a time investment of no more than a few hours over the course of a few months.

    The consumer is free to shop around if they don't like what a Bank is offering.

    Banks can pedal their business as they like whether we like it or not and whether we think its fair or not.

    I know Brendan and others are of the opinion that customers are being treated unfairly in this instance but I for one am not persuaded by the arguments.

    Unless they are breaking the law or treating customers unfairly as per the regulations then they have nothing to answer to. I don't think they are actually treating customers unfairly in the legal sense and if they were surely there would be much more of an uproar about all of this.
     
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  19. gnf_ireland

    gnf_ireland Frequent Poster

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    Personal question to @jim and @Sarenco - how many times have you personally switched your mortgages? Just curious since you both appear to think it is a very straightforward process?

    I will answer in my case - once from BOI to KBC in May 2015 !
     
  20. Sarenco

    Sarenco Frequent Poster

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