Mortgage rates and options for captive customers

The rates published by the Central Bank and by the ECB are for new customers – which includes existing mortgage holders who have a clear credit record and an LTV below 80% which allows them to switch lenders, so that they become new customers of some other institution.

But around 150,000 existing borrowers are captive customers who cannot switch lenders for one of the following reasons:

· They are in negative equity

· They have a Loan to Value in excess of 80%

· They are in arrears or they have been in arrears in recent years

· Their income has fallen since they took out their mortgage – which could be due to pay cuts or due to one of a couple leaving work to care for the family

· They got a loan when loans of 5 times income were being given out, but they do not meet the new 3.5 times loan criteria

· Old loans where the remaining balance is too low so that the potential savings from switching do not justify the costs of switching

In particular, customers of the lenders who are no longer trading in Ireland are in a very difficult position – these include Danske Bank; ACC Bank; and the former customers of Irish Nationwide. Bank of Scotland customers are not affected as they almost all had trackers or interest rate caps.



Why do all the lenders other than AIB maintain very high Standard Variable Rates? Because competition has no effect on these customers. They can’t actually move. They have to pay whatever price their lender charges them.

The lenders also know that the vast majority of existing customers who could actually switch lender, will never do so. They will continue paying the very high Standard Variable Rate by default.

So what should be done for these borrowers?

The Minister for Finance and the Central Bank and other commentators argue that the advent of competition will solve the problem of high mortgage rates. But competition will be of no benefit whatsoever to those customers who can't switch lenders.

1) Legislation should be brought in which prevents lenders from offering new customers different products or lower rates than existing customers with the same Loan to Value. So, for example, a KBC customer on a low Loan to Variable rate would pay a rate of 3.5%.

I am not sure how this would apply to lenders who offer short-term incentives e.g. Bank of Ireland's 2% cash back. Maybe, simply ban these incentives completely. If lenders want to attract new business, then make them offer good value rates equally to all their customers.

Maybe allow those who can't be bothered to ask for a lower rate to continue paying the higher rate. So if BoI brings in a new rate, an existing customer would not get it automatically, but would have to apply for it.

2) Legislation should be brought which would require lenders to apply to the Central Bank for permission to charge a variable rate in excess of 3% above the ECB rate. So they could charge whatever rate they want up to 3%. But above that rate, they would have to justify it. This would allow sub-prime lending to continue.

I agree totally with your solution. Minister Noonan needs to get into gear within the next week or two and show the voters he means business when dealing with the banks who up to now have been treating customers with total disdain and have ignored any initiative from the government.

Likewise, watching and waiting for some positive action from Minister Noonan.

According to this mornings Independent Business News Noonan will not be asking banks to change their variable rates. If this is they case it's time to start an all out war against this neo liberal government. They are rolling out their pre election promises and Morgage holders are being ignored. Bear in mind that a lot of people will loose their Morgage interest relief come 2016. I will be emailing all my local reps and the minister today. I urge everyone to do likewise.

Hi Ger, I hadn't heard what came out of his meetings with the banks but like yourself I'm not one bit surprised. Fair play to you for mentioning the fact that most people will have lost their mortgage interest relief by next year. As well as paying the high rates most including myself will have to do so without any relief from January. Absolutely email you're TDS etc, I have already done so and will again before the election . Our problem here for me like I've been saying before is not enough of the people affected are doing anything and you can be rest assured the minister and the banks know this. Most irish people are good at giving out about different issues but few will do anything . This campaign needs to be stepped up and I've previously advocated public protests, eg outside the Dail, dept of finance and bank has. I feel though that there isn't enough support for this because for me if u can't get much support for it on this forum what chance is there. I have thought of placing individual pickets on my tds clinics instead of emailing them as many of their replies are a party policy reply or they don't bother replying eg if u email the fg td for done gal sw and the one for cork NW you will get the same response. My constituency includes Joan Burton and leo varadkar so maybe it helps to have high profile tds. In the absence of enough people to support a public campaign I can't think of other ways. If nearer the election campaign I do decide to go for an individual picket I will mention a time and place on this forum first.

The problem outlined by Brendan above is even more acute for a relatively small number of borrowers that took out home loans with sub-prime lenders. Another poster reported today that he is being charged an SVR of 6.9% (!!) - now that really is extortionate.

I fully agree that borrowers in this position deserve a degree of legal protection. However, I disagree with any solution that vests a discretion in any State official to fix or control any interest rate or otherwise unduly impacts on competition within the mortgage market.

My suggestion is the introduction of a statutory interest rate cap equivalent to 120% of the new floating home loan rate for the time being as reported to the ECB by the Central Bank and calculated in accordance with detailed EU-wide regulations. This rate currently stands at 3.38% so, under my proposal, home loan rates would currently be capped at 4%, which would be a significant advance for many borrowers.

Another alternative would be the French model, which caps variable rate home loans at 133% of the average outstanding variable rate applicable to all home loans in the previous quarter. My only difficulty with this proposal is that we would have to frame detailed regulations to define how the average rate is calculated, rather than simply leveraging off a body of regulations that are already in place.

It is certainly possible that a statutory mortgage cap could constrain the growth of sub-prime lenders and that low income borrowers might find it more difficult to raise finance to purchase homes. However, I think the new Central Bank LTV and LTI restrictions will have a far greater impact in this regard so this is probably no longer a major consideration.

Sarenco said:

Another poster reported today that he is being charged an SVR of 6.9% (!!) - now that really is extortionate.

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Hi Sarenco

Sub-prime borrowing is expensive. If you cap mortgage rates at 133% of the average, you are effectively banning sub-prime lending.

It has a role. In the past, people with impaired credit records borrowed at sub-prime rates, but as their credit record improved, they switched to prime lenders.

I don't know if it's right to ban this or regulate it.

As I have pointed out elsewhere, the 133% would not solve the Irish problem as all lenders are charging exploitative rates. If there were serious competition and fair rates, one lender would not be able to charge more than 133% which would be a protection.

I hate the idea of interfering in the market, but the market is broken and run by a cartel, so I have to overcome my ideological objections to the state interfering.

Brendan

Brendan Burgess said:

Hi Sarenco

Sub-prime borrowing is expensive. If you cap mortgage rates at 133% of the average, you are effectively banning sub-prime lending.

It has a role. In the past, people with impaired credit records borrowed at sub-prime rates, but as their credit record improved, they switched to prime lenders.

I don't know if it's right to ban this or regulate it.

As I have pointed out elsewhere, the 133% would not solve the Irish problem as all lenders are charging exploitative rates. If there were serious competition and fair rates, one lender would not be able to charge more than 133% which would be a protection.

I hate the idea of interfering in the market, but the market is broken and run by a cartel, so I have to overcome my ideological objections to the state interfering.

Brendan

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Hi Brendan

I take the point about sub-prime lending having some possible role for borrowers with impaired credit ratings but, in Ireland at least, these types of loans were typically availed of by borrowers with high LTVs and/or LTIs. The new Central Bank rules should effectively put an end to this type of lending.

In my opinion, it would be preferable from a societal perspective if borrowers with poor credit ratings simply rented until their credit ratings improved sufficiently to qualify for a mortgage with a prime lender given the very significant harm caused by sub-prime lending in Ireland and elsewhere. An SVR of 6.9% is usurious in the current environment whatever way you look at it and I personally would have no problem outlawing this type of lending.

The French model of restricting variable rates to 133% of the average rate charged on all outstanding variable rates in the previous quarter would capture trackers (which are obviously a type of variable rate mortgage). It then depends how you calculate the "average" rate but it would currently be somewhat less than 3% in Ireland (and therefore variable rates would currently be capped at less than 4%).

My preference is for a statutory cap of 120% of the new home loan floating rate, simply because the Rulebook is already in place for calculating this figure, but it gets you to more or less the same place.

I would see a number of problems with your suggestion of requiring lenders to seek permission from the Central Bank to charge any rate over 3%:-

• Firstly, why 3%? Why not 2.5% or 4%?
• Would 3% be fixed for all time or could this reference rate be varied and, if so, by whom and on what basis?
• What criteria could the Central Bank apply in granting or refusing permission to allow a higher rate to be charged? Would historic loan impairments be relevant? Provisioning levels? Cost of funds and capital? The LTV, LTI and credit rating of a borrower or category of borrowers? Is a lender allowed to make a profit and, if so, what would be an acceptable profit margin? What happens if a lender is not making a profit generally? Would any adverse impact on deposit rates or higher rates on other loan products be relevant considerations?
• What happens if the Central Bank automatically granted permission for all lenders to charge rates above 3% (which seems highly probable at the moment given the recent comments of the CBI and ECB)?
• Would a lender have a right of appeal from a decision of the CBI and, if so, to whom?
• Would arrangement fees (which are common in many jurisdictions) be allowed?
• If sub-prime lending is to be allowed, how is this to be defined?
• Would the proposal be acceptable under EU banking and/or competition law?

Sarenco said:

I would see a number of problems with your suggestion of requiring lenders to seek permission from the Central Bank to charge any rate over 3%:-

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Hi Sarenco, I missed that when you posted it originally.

• Firstly, why 3%? Why not 2.5% or 4%?

The average rate across the Eurozone is 2.04%. I am adding a full percentage point to this. This leaves plenty of profit for lenders while preventing lenders from exploiting borrowers who can't move.

• Would 3% be fixed for all time or could this reference rate be varied and, if so, by whom and on what basis?

Good point. The legislation could be framed to allow the Minister set the rate by order. Or maybe leave it at 3% and let the Dáil decide to reduce or increase it.

• What criteria could the Central Bank apply in granting or refusing permission to allow a higher rate to be charged? Would historic loan impairments be relevant? Provisioning levels? Cost of funds and capital? The LTV, LTI and credit rating of a borrower or category of borrowers? Is a lender allowed to make a profit and, if so, what would be an acceptable profit margin? What happens if a lender is not making a profit generally? Would any adverse impact on deposit rates or higher rates on other loan products be relevant considerations?

The only criterion would be the profitability of the product and not the history of the bank.

• What happens if the Central Bank automatically granted permission for all lenders to charge rates above 3% (which seems highly probable at the moment given the recent comments of the CBI and ECB)?

The legislation would be framed in such a way that they had to only approve by exception. The fact that the Central Banks has been lying about mortgage rates in Ireland and that their first priority is to make the banks as profitable as possible, are not reasons for giving them the power to approve rates in excess of 3%. The ideal solution would be a fair banking system without the need for interference.

• Would a lender have a right of appeal from a decision of the CBI and, if so, to whom?

It would be very hard to have an appeal system. If you did, it would have to be two way. Borrowers could appeal against the rates as well.

• Would arrangement fees (which are common in many jurisdictions) be allowed?

Yes. I have no problem with them. They would have to come under the approval process as a bank could not charge an arrangement fee to get around the rules.

• If sub-prime lending is to be allowed, how is this to be defined?

You make a good case for getting rid of it and requiring people to rent until their credit record is fixed. I am not sure that it would need to be defined. If a lender makes a case for charging more than 3%, then they can charge more than 3%

• Would the proposal be acceptable under EU banking and/or competition law?

I am not an expert in this area, but I don't know of any barriers.

Posts about Sarenco's capping of mortgage rates at 133% of average have been moved to here where there is a more in-depth discussion

Suggestion: Cap existing rates at 125% of the new business rate

Hi Brendan,

I have a mortgage with BOI since 2012 and am on a SVR of 4.550%.

Unfortunately I cannot switch because since we took out the mortgage, I have had a second child and am currently on a career break, so our financial position is not what it was originally.

I rang BOI a few weeks ago stating that I was planning to switch to another lender (even though I knew this wouldn't be possible) and asked them if there was a lower variable interest rate thy they could offer me. They flat out refused, said there was nothing they could do, except offer me a fixed rate for two years of 3.7%, however they told me that I would have to pay for one of their valuers to come out and value my house, before I could move to this lower fixed rate.

I fully intended to pay for this valuation this month, as it will mean a reduction of over €100 per month in my monthly mortgage repayments so I rang BOI the other day to arrange this.

This time I was told that there is no need for a valuation, they can see that my LTV is between 61%-80% and I can automatically move onto a fixed rate of 3.6% and only have to fix for 1 year!!! They also offered me the option of moving onto a new variable rate of 4.500% (why even bother??!).

I'm delighted with this - it doesn't look like anything is happening in the immediate short-term future with regards to BOI's variable interest rates, so I figure I'm better off paying a reduced interest rate of 3.6% instead of 4.55% and I'm only tied in for one year.

I received the letter today, detailing the information I've given, above however there's a bolded sentence at the end of the letter stating "If you avail of a Fixed Rate, our tracker rate commitment to you is deemed to be at an end and the lender's prevailing Standard Variable Rate will apply on expiry of this fixed term. For the avoidance of doubt, we wish to advise you that if you avail of a Fixed Rate, you will lose the ability to avail of a Tracker Rate Mortgage in the future."

Does this mean that if I move onto a fixed rate, then I will never be eligible for a tracker rate at any point in the future, should BOI start offering them again?

What do you think? Apologies for the long-winded post.