Should Askaboutmoney publish a Fair Mortgage Charter?

[gnf_ireland]

The more I think of it, the more I believe that the incentives for new customers such as 2% cash back, should be excluded from any Fair Mortgage Product. If they are not banned, then existing customers should be able to avail of them as well.

I think this is going to be tricky to enforce, as cashback incentives are relatively common place in the market generally. Even Bord Gais Energy do they with their 100 euro cash-back any time you want...

What about if they were changed to a number of mortgage 'free passes' over the lifetime of the mortgage, or an 11 month mortgage model whereby you can skip a mortgage payment month during an expensive part of the year (eg christmas or back to school)...

Problem is the marketing people will come up with clever new products to support advertising campaigns and attract new customers. I don't necessarily think this is bad - the opposite in fact as it offers customer a choice of products. Its more down to the customers and brokers educating themselves on what it really means for them.

What my proposal hopes to gain would be free movement between these products - but if banks end up agreeing to this they will simply replace an upfront promotion with a staggered one - so repayable over a longer period of time to offset the financial risk.

 

[gnf_ireland]

How about this as a suggestion around a Fair Mortgage Product:

The bank have to clearly state what the mortgage balance and total amount repaid (less any promotional cashback) on the 3rd, 5th and 10th anniversary of the mortgage as part of all mortgage offer letters (or approval in principle), for each of the applicable rate. This would be on the basis of
- variable product rates remain as they are today
- on expiry of the fixed term, the customer automatically rolls onto a defined default product (whatever it is) which clearly states the rate as applicable today

This should allow customers to see the real impact of whatever deals are being offered and also clearly state the rollover product in terms of coming off fixed rates


Any thoughts/opinions here?

 

[Brendan Burgess]

The bank have to clearly state what the mortgage balance and total amount repaid

I don't agree with this at all as it doesn't take into account the time value of money.

I would like a situation where the banks compete on mortgage rates. And it's very easy to compare the offers from the different lenders.

So BoI would be forced to offer something close to the best rate in the market and could not get business by gimmicks.

KBC should not be able to get business by giving someone a variable rate which does not go down.

We don't want a health insurance situation where there are thousands of products and people are paralysed by the choice on offer.

Brendan

 

[Brendan Burgess]

In the UK and elsewhere, many great value mortgages charge a set-up fee.

That is a much better model than the perverse model of cash-back on offer in Ireland.

It costs the lender money to set up a mortgage. They should charge for this directly and not recover the cost in higher mortgage rates.

Brendan

 

[44brendan]

Bottom line is what incentive is there for the banks to voluntarily sign up to any Charter? 2nd bottom line is what indications are there that the CB will impose either a type of Charter or change the SCR rules?
Assuming that I am the CEO of ABC Bank my current agenda is to maximize the income from my existing mortgage book and also agree an ongoing strategy to increase that book while retaining as high an income ratio as possible.
Any Charter that contains a requirement to include our current clients in any incentives to our new clients is going to reduce my overall profitability. This will also apply across the board to all of my competitors. Given no new market entrants I don't see any incentive to either my bank or my competitors to sign up to any voluntary Charter that will restrict our earnings.

What is the incentive to ABC Bank to agree to any such Charter?

 

[Brendan Burgess]

Hi 44b

Good questions. A mixture of carrot and stick.

I have pointed out at all the AGMs that treating customers fairly is not only a requirement of the Consumer Protection Code, it is also good for business.

So I would try to persuade some of the lenders to voluntarily sign up for the code.
They could then use it in their marketing - "We sign up to the Fair Mortgage Code".
I would encourage those who sell mortgages - i.e. the mortgage brokers not to sell any mortgages which don't comply.
I would ask the Central Bank to include it in the CPC.

Finally, if a few did sign up to it, it would be worth considering asking Michael McGrath to amend his bill on mortgage rates to exclude lenders who have signed up to the Code.

Brendan

 

[stefg]

The bank have to clearly state what the mortgage balance and total amount repaid (less any promotional cashback) on the 3rd, 5th and 10th

I think this would be very useful. As I am learning recently many people with mortgages don't really understand them so how are people really going to compare one to another. At the moment there are so many variations that obscure the real impact and a lot people focus solely on monthly repayment.

If banks were required to show an indicative table of the of cost of a mortgage for €100,000 for the various options it would be simple to compare to the other offers.

LTV	RATE	DURATION	TOTAL AMOUNT TO REPAY	FEES	DISCOUNT / CASH OFFERS	COST OF CREDIT	MONTHLY REPAYMENT	REMAINING 1YR	REMAINING 5YRS	REMAINING 10YRS	REMAINING 20YRS
<60%	3.2	10	€116,984.02	€0	€0	€16,984.02	€974.87	€94,281.24	€76,375.41	€0.00	-
<60%	3.2	20	€135,519.08	€0	€0	€35,519.08	€564.66	€97,593.66	€82,027.57	€59,551.98	€0.00
<60%	3.2	30	€155,688.07	€0	€0	€55,688.07	€432.47	€98,661.15	€90,000.43	€77,495.38	€45,609.98
<80%	3.5	10	etc
<80%	3.5	20	etc
<80%	3.5	30

This type of table would also show the impact of promotional rates because the calculations would have to factor the subsequent non-promotional rate too.

This table should be easily accessible for all mortgage products. The table for the new and old rates should be issued to customers if any of the following occur:

• A rate changes including
  • Any promotional rate
  • Any follow on rate
• A new mortgage product is offered (assuming all customers eligible to choose)

Any new product must be directly comparable and not employ any technique that obscures the ability to directly compare mortgages with the table.

Any conditions such as having a current account or minimum transactions etc should be specified with the table.

Would banks consider a price guarantee of sorts? E.g. if the average mortgage rate in the market over the prior 6 months was 0.5% greater that applied to the customer then the bank would pay all fees involved in switching banks. This would not help those who can't move but might prompt banks to check their rates but I don't know how realistic something like this would be. Some rates at the moment are far above the average.

 

[Brendan Burgess]

This type of table would also show the impact of promotional rates because the calculations would have to factor the subsequent non-promotional rate too.

I think that table is too complicated.
I also think that showing the "the total amount to repay" and "the cost of credit", which do not take into account the time value of money is just wrong.

I have great faith in the APR, but then people are prepared to take out a mortgage with BoI at a much higher APR because they get 2% cash back. Most people understand "cash-back" but not APR.

How would you factor in the cash back? Would you assume it was deducted from the opening balance in the first year?

I do like the idea of showing the balance after 5 years.
I think you should show only one term, so that it's less complicated and more comparable.
So let's say you did the tables over 25 years and only showed the balance only after 5 years.

For a loan of €100,000 over 25 years

Note: It is assumed that the 2% cash back is used to pay down the balance of the loan immediately. In other words, the borrower has a loan of €98,000. It is assumed that the borrower borrows the additional fee of €1,000. In other words, the initial loan is for €101,000.

OK, I can see how the total payments over 5 years would be useful in that table.

So while the total repayments over 5 years don't take into account the time value of money, they do allow comparisons between different loans repayment rates.

This table makes it clear that if you pay an administration fee up front, after 5 years, you will have much made much lower repayments and you will have a lower rate for the future.

Brendan

 

[stefg]

I think that table is too complicated.

Looking with a fresh pair of eyes this morning I completely agree with you. There is too much to take in.

I also think that showing the "the total amount to repay" and "the cost of credit", which do not take into account the time value of money is just wrong.

I don't agree with you on that. While the time value of money is important and the actual amounts may not be accurate as rates fluctuate, it is a useful comparison metric. If offer A has cash back, free insurance, free switching fees and introductory rate 0.5% less than offer B and offer B has no offers just a rate, it would seem a good deal. However if the cost of credit over the term is highlighted and A costs €55,000 and B costs €35,000 (possibly due to terrible post promotional rates) then it is clear in my mind that A is not a better offer than B despite it appearing so initially.

Possibly what needs to be shown is the the cost of credit or repayment amount at the full-term, based on current rates, and the cost of credit for 1 year (or the minimum term after which you can change but the interval would have to be same for all lenders for this to be comparable). This might give some indication of short term value versus long term value and may encourage the switching process. People may take loans that are good value now but not long term with the assumption that they will switch in a year etc. However, switching seems to be rare from what I have heard.

I have great faith in the APR, but then people are prepared to take out a mortgage with BoI at a much higher APR because they get 2% cash back. Most people understand "cash-back" but not APR.

My point is APR is effective but it is being convoluted with cash back, promotional offers etc etc etc. I think a cash value comparison is something people understand, A at €55,000 versus B at €35,000 is clearly more expensive even if these are indicative values. If after 1 year, A has an effective cost (charges - value of cash and offers) of €1,500 and B has a cost of €3,000 then it is clear that in the short term A is better value. So the wise choice might be take A and switch after 1 year.

I do like the idea of showing the balance after 5 years.

Maybe 5 years makes more sense than 1 year but possibly showing 1 or 2 year values would encourage more switching?

I think you should show only one term, so that it's less complicated and more comparable.

Agreed, I think less is more in this case but as I said above I think what term to display needs some consideration.

Consider the following tables from 2 banks:

LTV	Rate	Duration	Fees	Discounts / Cash Offers	Monthly repayment	Effective Cost After 1 Year	Effective Cost full term
<80%	3.2*	20	0	€2,000	€564.66	€110.96	€43,037.38

* promotional rate applicable for 1 year, subsequent rate is currently 4%.

LTV	Rate	Duration	Fees	Discounts / Cash Offers	Monthly repayment	Effective Cost After 1 Year	Effective Cost full term
<80%	3.4	20	€500	0	€574.83	€2,743.41	€38,460.23

Which would you want and why? It seems clear to me A is good short term but not long term from the above.

 

[gnf_ireland]

OK, I can see how the total payments over 5 years would be useful in that table.

@Brendan Burgess I will concede that maybe my original suggestion was too complicated, but the 5 years one is of benefit to most I think. Agree that it should show the total repayments as well as the balance on year 5

In essence, the principle I am trying to assist with is that people need assistance in understanding the best mortgage product to be on, and understand the impacts cashback and potential arrangement fees would have for them. Its about assisting the customer to make the best educated decision possible

If the banks would not be willing to do this, I am wondering would brokers be willing to?