Why trimming the fixed rates is not enough

Brendan Burgess

Brendan Burgess

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Bank of Ireland told the Minister for Finance that they would trim the fixed rates instead of cutting the variable rates.

They later announced their fixed rates which you can find here:
Bank of Ireland trims fixed rates

An existing BoI customer with an LTV <80% can fix for two years at 3.6%. So what is wrong with that?

Whether fixed or variable, a rate of 3.6% is still too high.
The average rates across the eurozone are as follows (April 2015 figures)
Variable rates and fixed up to one year: 2.02%
Fixed between 1 and 5 years: 2.4%
Fixed between 5 and 10 years: 2.16%
Fixed over 10 years: 2.38%

While the rate in Ireland should be a bit higher because it's very difficult and expensive for a lender to enforce its security, a difference of 1.6% is not justified.

You can see the variable rate in each country [broken link removed].

Fixed rate mortgages have significant disadvantages
  • The borrower can't overpay the mortgage or pay off capital sums without penalty
  • If the borrower wants to move home, they will face an early repayment penalty
  • The borrower can't switch lenders if another bank offers a better deal
  • The fixed rate usually has an additional margin built in
  • When the fixed term is up, the borrower may default to a high rate without realising it
So borrowers should always have an option of a fair variable mortgage rate.

Why does Bank of Ireland want to keep a high SVR but offer lower fixed rates?

Due to inertia, most customers will simply pay the high SVR. They won't bother checking to see if they are on the best rate and they won't bother switching lender for a better rate.

If someone does fix their rate for two years, they will be tied into Bank of Ireland for the two years and will not be able to switch to another lender.

At the end of the two years, they will default to the high SVR. Some will check to see if they are getting the best rates, but most won't bother.

This is the situation in the UK and Northern Ireland. [broken link removed]charges a Standard Variable Rate of 4.49% but borrowers borrowing less than 80% can fix for two years at 2.25%. (With 65% LTV, they can get tracker rates as low as 1.99% from HSBC.)

But wouldn't long term fixed rates be good for borrowers and house price stability?

There is an argument that long-term fixed rates would be good for everyone. Borrowers who fix for ten years would be better able to budget. Long-term fixed rates are more stable so house prices would not react as much as they do to variable rates.

If Bank of Ireland offered a ten year fixed rate at the Eurozone average of 2.4%, then there might be some sense to this argument. But no one should fix for ten years at 4.2%.
 
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As I would see it, the whole rationale of offering lower "fixed rate" deals is similar to the approach by the likes of Sky/UPC who offer dissatisfied clients half price Sky Sports/Movies for a 6/12 month period. I.E you keep the client and your discount is for a limited time period only. Comparatively a drop in the variable rate is likely to have a long term significant cost for the banks. A drop in variable rates at this time would be difficult to ever reverse. The recent focus on high variable rates means that any cut is likely to effect long-term margins as rates are only likely to increase in the future in line with Euribor changes.
This is a good strategy by the banks to deflect the current crisis and it remains to be seen whether it will placate the masseso_O
 
Hi brendan

An interesting point of view.

But why doesn't Bank of Ireland offer fixed rates for only 6 months? Why do they set a minimum of 2 years for a fixed rate.

Of course, I am making an assumption that the Bank is rational.

Brendan
 
I'm out of touch with the money market process Brendan. From my previous experience all fixed rates were purchased by the banks on the market. I.e. the banks entered into a commitment to buy funds over a 1/2/3 year period and the associated cost was locked in. bank would then input their own margin to this cost. From what I remember the minimum FR term was 1 year. Set up/operational costs would likely be not effective towards a 6 month product.
 
Brendan Burgess said:
But why doesn't Bank of Ireland offer fixed rates for only 6 months? Why do they set a minimum of 2 years for a fixed rate.
Click to expand...

they have a 1 year rate for new customers - I wonder if they can be persuaded to make it available for existing customers. I'd fix for a year maybe, but not 2.
 
Brendan Burgess said:
Due to inertia, most customers will simply pay the high SVR. They won't bother checking to see if they are on the best rate and they won't bother switching lender for a better rate.
Click to expand...
My understanding is that the lender will (and must?) write to the borrower to explain the options available when the fixed rate period is expiring.
That being the case the borrower only has him/herself to blame if s/he doesn't read the letter and make an informed decision.
In fact I reckon that anybody paying over the odds for any product or service due to inertia only has themselves to blame. :D
(I'm even allowing for the unnecessary complexity of some lenders' letters to borrowers - in particular BoI's in my experience. On Brendan's prompting I will be writing to the CB about this - as I see it - unnecessary complexity ).
 
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