Prime Time programme on the SVR

Brendan Burgess said:
However, in this case, the house is worth more than that outstanding mortgage, so the lender will not lose.
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There's maybe 100k in equity alright by the looks of it. But the costs of various court cases, including the High Court, staff time spend on this, legal exps etc.
The bank certainly aren't up on this house!
 
Hi Sarenco! This post represents a reasonably fair reflection of the actual cost to the Banks. However the figures exclude any loan loss provision reserve. I do acknowledge that potential for loan losses on new loans will be much lower than those on historic cases given the changes in asssessment and approval processes.
However if you take the figures given by you as being the average marginal cost to the bank of a new loan and 4.5% being the average gross interest return then the annual return to the bank on a loan of 100k is 1,860. However, if during the year the bank suffered a bad debt of 10,000 on its' mortgage book (small enough) that bad debt is the equivalent interest return on 537, 000 of good lending. I.e. The bank is only making profit on its' loan book if it can maintain loan losses at below 1.86%. Given the historic position and continuing losses on the basis of Court procrastination on reposessions and costs of same, I would find it hard to make a case that any bank is making money on its mortgage book!!!
 
44brendan said:
I would find it hard to make a case that any bank is making money on its mortgage book!!!
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Hi Brendan

The lenders have made big mistakes in the past, so they have suffered defaults - which have now been fully provided for. They should not be a source of continuing losses.

They have provided cheap trackers which will make small losses for them over the coming years.

But for new business today with an 80% LTV at 4.4% , they are making big profits.

In a market with normal competition, the different LTV products would be differentially priced and the lower LTVs would fall towards the Eurozone average of 2.6%
 
There may be potential to make big profits in the future Brendan. However, this will entirely depend on the loan loss provisioning requirement! At 80% LTV and assuming that this is an ample ratio to cater for any future drop in value of the security, also assuming that the ability to re-posess properties in a default situation is simplified yes I agree that mortgage lending can look attractive again. If so this will entice competitors to the market and a resultant reduction in pricing!
In my view there is scope for a price matrix based on risk, rather than the one size fits all model. It makes sense for a bank to use price as an incentive to attract low LTV/High repayment capacity clients!
 



Thanks for following up on this 44brendan.

I certainly accept that banks are not generating outsized profits on new mortgage lending at current pricing levels. My point was that current (elevated) pricing is being driven, in part, by the restricted scope of the banks to increase lending but more particularly by the inability of the banks to replace defaulting mortgages within their back books with higher margin, better credit quality, capital efficient loans. I was really just trying to challenge the repeated assertion of Brian Hayes and others that high SVR mortgage rates are simply subsidising loss-making trackers, which I believe misrepresents the position.

I’m obviously happy to be corrected if I have misunderstood any technicalities of bank accounting.

To Brendan’s point regarding risk based pricing, I am certainly hearing from colleagues in residential property that KBC are already competing very effectively with the “pillar banks” with their low LTV products. This may indicate that there is scope for further competition within this segment of the market – I suppose time will tell.
 
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