# CCPC comments on mortgage lending



## Brendan Burgess (31 Aug 2022)

The CCPC made a submission to the Retail Banking Review

https://www.ccpc.ie/business/wp-con...inance-Retail-Banking-Review-Consultation.pdf

It included the following suggestion.

Generally, on expiry of a fixed rate period, if a consumer does not re-start a fixed rate period or switch their mortgage to another provider, the lender will move them onto the applicable variable interest rate at the end of the fixed term. Depending on the lender and the previous fixed term rate, the variable rate could be above or below the previous rate.

The CCPC believes that the application of default interest rates in this manner can lead to unfair consumer outcomes, particularly for those who are unable to engage with their bank on expiry of a fixed rate period, for reasons which may include a lack of knowledge or understanding of the benefits of such engagement or low financial literacy, as discussed further below, as those consumers may pay more for their mortgage where their risk profile and the cost to the provider of servicing the mortgage has not changed. That additional cost to the consumer may, considering the long-term nature and high value of many mortgages, be significant.

The CCPC notes the June 2018 Addendum to the Central Bank’s Consumer Protection Code for Enhanced Mortgage Switching Measures: Transparency and Switching (June 2018 Addendum) sets out the requirement for mortgage lenders to engage with consumers  at the end of a mortgage fixed term period in a number of ways and provide them with information about the default interest rate which will apply and alternative interest rates offered by that lender.  

The CCPC recommends that a revised Consumer Protection Code should mandate mortgage providers to offer the same rate or equivalent best rate to a consumer at the end of an initial fixed term.  The Central Bank should also consider the differentials between offers made to new and existing customers and their appropriateness or otherwise.  

*Recommendation:
The Central Bank should examine the loyalty costs arising from consumers rolling over onto higher mortgage interest rates at the expiry of a fixed term and identify measures to address this in the revised Consumer Protection Code.  *


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## Brendan Burgess (31 Aug 2022)

The CCPC really does not have a clue about mortgages. It is very frustrating. 

It is a deliberate policy of all the bank, with the possible exception of Avant, to have much higher variable rates than fixed rates. At a time when rates are rising, the fixed rates should actually be higher. 

These variable rates are deliberately kept high as they are the default rates.

The CCPC should highlight this as a deliberate strategy and not come up with nonsense such as " Depending on the lender and the previous fixed term rate, the variable rate could be above or below the previous rate."   In most, if not all cases, the variable rate is higher.


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## Brendan Burgess (31 Aug 2022)

And then the most important point is thrown in as an afterthought: 

_The Central Bank should also consider the differentials between offers made to new and existing customers and their appropriateness or otherwise._


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## NoRegretsCoyote (31 Aug 2022)

Brendan Burgess said:


> The CCPC recommends that a revised Consumer Protection Code should mandate mortgage providers to offer the same rate or equivalent best rate to a consumer at the end of an initial fixed term. The Central Bank should also consider the differentials between offers made to new and existing customers and their appropriateness or otherwise.


Lenders do exploit consumer ignorance on this topic. The last time I checked there is something like a third of outstanding mortgages on variable rates. I would guess most of these have rolled onto a variable after expiry of a fixed rate, or were on a variable and simply don't realise that fixe d rates have been lower for most of the last decade. Unless there is a restructure, these customers could move tomorrow to a fixed rate and save money. There is tens or maybe hundreds of millions of euros in annual savings out there - that's a lot of money!


I have mixed feelings on consumer protections mandating particular outcomes like automatically putting consumers onto the best possible fixed rate on expiry of the previous one. On the one hand ignorant consumers will do better, but the flip side must be that the active consumer does worse as there is no longer such a big cross-subsidy. Banks will be less likely to innovate in general if they can't offer products to a subset of more active consumers. Lots of retailers provide discounts via vouchers but few enough are active enough to use them. Should the CCPC force all retailers to apply the same discount to all consumers regardless of whether they present a voucher? Very few would argue that they should.


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## Brendan Burgess (31 Aug 2022)

Brendan Burgess said:


> The CCPC recommends that a revised Consumer Protection Code should mandate mortgage providers to offer the same rate or equivalent best rate to a consumer at the end of an initial fixed term.





NoRegretsCoyote said:


> automatically putting consumers onto the best possible fixed rate on expiry of the previous one.



I had meant to comment on that. 

Seems like an odd suggestion. 

I come to the end of a 5 years fixed rate at 2.5%.  Does the bank have to put me on that rate for the next 5 years or put me by default onto the then current 5 years fixed rate?  Banks would exploit this by hiking up whatever the default rate was. 

The solution is to highlight how the variable rates are artificially high to exploit the lazy borrowers.  And to require lenders to offer existing customers the same deals on offer to new customers. 

Brendan


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## Paul F (31 Aug 2022)

NoRegretsCoyote said:


> automatically putting consumers onto the best possible fixed rate on expiry of the previous one


You would then have the issue of some customers being hit with a break fee if they switched providers, which you could argue would be unfair since they didn't explicitly opt in to re-fixing.

Charlie Weston wrote in the Indo in July about a Central Bank paper on customer inertia:








						Mortgage borrowers don’t opt for a cheaper rate even when there’s no cost – major study finds
					

MOST homeowners will not opt for a cheaper mortgage rate even when it is offered to them at no cost, a new survey has found.




					www.independent.ie
				





> Research by the Central Bank has found that only a third of mortgage holders who were offered a cheaper lending rate took up the offer.
> 
> This was despite the fact that they could have saved €490 in the first year, and €5,400 on average overall.





> Those who have missed payments in the past are among the least likely to react of offers of better rates from their lender.
> 
> “This shows that a negative experience can reduce engagement with borrowers over other mortgage decisions.,” Mr Devine wrote.



Many people are just terrified of personal finance.

Here is the paper in question: "Refinancing Inertia in the Irish Mortgage Market", Kenneth Devine


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## TRS30 (31 Aug 2022)

Brendan Burgess said:


> And then the most important point is thrown in as an afterthought:
> 
> _The Central Bank should also consider the differentials between offers made to new and existing customers and their appropriateness or otherwise._



This could come into play for me following the UB switch to PTSB. I have a few years as re-fixed with UB recently. Not at all confident that this will be addresses and changed in the next 4/5 years so will most likely have to look to switch lender.


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## NoRegretsCoyote (31 Aug 2022)

Paul F said:


> You would then have the issue of some customers being hit with a break fee if they switched providers, which you could argue would be unfair since they didn't explicitly opt in to re-fixing.


Exactly. 

Discriminating between new and existing customers is common in any market you can think of. The CBI has banned it in insurance for reasons that make no sense to me and it would be a pity if the mortgage market went down the same route.

It's a sad but unavoidable fact that most consumers at most times are not very discerning or savvy. I include myself in this. When I was time rich and cash poor I spent a lot of time hunting down the best price. Now I'm the opposite and I don't haggle or do market research nearly as much.

More conscious customers are the ones who in general trial new products and seek out the keenest prices. That's in general good for the rest of us in the long run! Banning firms from offering different prices to different segments of consumers can be bad for everyone.


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## Paul F (31 Aug 2022)

NoRegretsCoyote said:


> Discriminating between new and existing customers is common in any market you can think of. The CBI has banned it in insurance for reasons that make no sense to me and it would be a pity if the mortgage market went down the same route.
> 
> It's a sad but unavoidable fact that most consumers at most times are not very discerning or savvy. I include myself in this. When I was time rich and cash poor I spent a lot of time hunting down the best price. Now I'm the opposite and I don't haggle or do market research nearly as much.


But I think that the situation with mortgage cashback is significantly different from the case of two providers, e.g., mobile phone or insurance companies, having different prices for broadly similar plans.

Firstly, the difference between a 2.4% interest rate and a 3% interest rate means almost nothing to the vast majority of people – they wouldn't even know where to begin assessing the difference in cost.

Secondly, when you throw cashback into the mix, which is essentially quoted using a different "scale" (€ versus %), the chance of a consumer making the best (long- or short-term) decision becomes much lower. (It took me a while to figure out how best to compare different rates where one offers cashback and the other doesn't. In the end I figured I had to pick a "time horizon", usually 4 years, when assessing the cost difference – but that was out of necessity, not because there is a single "right" time horizon to use.)

Thirdly, it seems to be something of an open secret that some first-time buyers are using the 2% cashback offered by certain lenders as a way to essentially borrow up to 92% LTV, which goes completely against the Central Bank's macroprudential rules. (Lenders only give a handful of LTV exemptions to FTBs.) We shouldn't ever again think that house prices can only rise. These borrowers end up with a house with only 8% equity _and_ a mortgage that will cost them a lot more over the long term.

Finally, mortgages are different from most other products in that, in the CCPC's own words:


> That additional cost to the consumer may, considering the long-term nature and high value of many mortgages, be significant.



Edit: my post crossed over with Brendan's, below.


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## Brendan Burgess (31 Aug 2022)

NoRegretsCoyote said:


> Discriminating between new and existing customers is common in any market you can think of.



But it doesn't make it right! 



NoRegretsCoyote said:


> The CBI has banned it in insurance for reasons that make no sense to me and it would be a pity if the mortgage market went down the same route.



I am sure that they issued their reasoning for it at the time. 

What was happening was that insurance companies were using big data to identify which consumers were least likely to shop around and were hitting them with very high prices. This is price walking. 

And the mortgage market is a  very different market and absolutely discriminating against existing customers should have been banned years ago. 


It is expensive and time consuming to switch your mortgage, unlike electricity which you can do online yourself.
People can understand the cost of insurance and gas, but most are unable to evaluate mortgages. 
But the worst part is that the likes of BoI and ptsb keep their rates artificially high. They would get no new business at these rates. But they get new business with cash back.  So this allows them to exploit the lazy and the less informed. 

Brendan


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## lff12 (29 Sep 2022)

NoRegretsCoyote said:


> Lenders do exploit consumer ignorance on this topic. The last time I checked there is something like a third of outstanding mortgages on variable rates. I would guess most of these have rolled onto a variable after expiry of a fixed rate, or were on a variable and simply don't realise that fixe d rates have been lower for most of the last decade. Unless there is a restructure, these customers could move tomorrow to a fixed rate and save money. There is tens or maybe hundreds of millions of euros in annual savings out there - that's a lot of money!


Customer inertia is a huge reason for our lack of development of competition, not just in banking, but in health insurance and other financial products.


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