Should lenders be obliged to offer existing customers the rates on offer to new customers?

[jim]

but you sign a contract when you get a mortgage and in that contract is the rate you agreed to with the bank. so I understand that its potentially unfair on existing customers when a newer customer contracts a better rate with the bank. but likewise interest rates could rise and therefore does that mean that existing customers should then pay higher rates. where would you draw the line.

 

[Brendan Burgess]

Hi jim

Under the contract with the bank, the lender can raise the interest rate to whatever level they like.
In theory, this is the same as a utility contract. Bord Gais can raise the gas price to whatever price they like.

The borrower or gas user can switch to a cheaper provider.

But it's expensive and time consuming to switch mortgages and the figures are usually much larger.

So borrowers need to have some form of protection.

likewise interest rates could rise and therefore does that mean that existing customers should then pay higher rates. where would you draw the line.

I don't fully understand this? If the lender decides that it wants to raise the rate on <80% LTV mortgages, then it's free to do so. But it can't raise the rates for women more than for men, unless their data show that women default more often. Likewise, they should not discriminate between new and existing customers.

Brendan

 

[Andy836]

The main problems with this are:
- You're seeking to amend existing contracts which were agreed in good faith by both parties,
- Trying to say the "relationship" with the Bank extends to 30 years but a relationship with a car dealer doesn't is not valid. Many purchase cars through vendor/dealer financing, if something happens the car within 2 years you've recourse under the warranty, if the vehicle is defective you can return it etc.
- Would it make these home loans ineligible for securitization? I'm not sure about that but it's a consideration.
- This is just a way to legislate for laziness i.e. people are too lazy to switch. On a 300k loan over 30 years, a 20bps lower margin would save the Borrower 13k. But you say it's time consuming & expensive........

A home loan is conceptually the same as any other product. You're buying money now and agreeing to pay X for it. The fact that X is a long winded installment definition doesn't change the fact that you're only buying the loan once.

Are you in favor of the corollary, if new mortgage rates increase then the Bank should be entitled to increase the margin on pre-existing mortgages. There's an awful lot of home loans out there on ECB+40bps.....

 

[Brendan Burgess]

A home loan is conceptually the same as any other product. You're buying money now and agreeing to pay X for it. The fact that X is a long winded installment definition doesn't change the fact that you're only buying the loan once.

It might be conceptually the same, but it's very different in reality. I did deal with this in my post

But we have no such controls or limits in any other industry! Why should we make an exception for the mortgage industry?

The mortgage market is different from every other market. The primary difference is the number of barriers to switching. If your phone provider increases the prices for existing customers, those customers can switch to another provider easily.

There are huge barriers to switching which are unique to the mortgage market

· The costs of switching mortgage are high – there is no cost to switching electricity supplier

· It is time consuming to switch provider – switching phone supplier is easy

· A customer needs a solicitor to switch mortgage providers – there is no cost to switching current accounts

· A borrower can’t switch if they have a bad credit record – Utility suppliers don’t check credit records

· A borrower can’t switch mortgages if their income or family circumstances have changed and they no longer meet the affordability criteria – suppliers of house insurance do not check a new customer’s affordability

There are other differences between the mortgage and other markets

· The Consumer Protection Code obliges lenders to treat customers fairly – there is no such obligation on utility providers.

· Mortgage payments are usually much larger than any other payment such as phone or electricity

· It is more difficult for ordinary consumers to understand and compare mortgage deals. Many people simply do not understand percentages. They are unable to incorporate 2% cash back into their mortgage decision. Gas prices are much easier to understand.

· When comparisons are difficult, the borrower will often default to the bank with whom they have their current account. So AIB and Bank of Ireland have almost a captive audience. There is no such tie-in with other industries.

· Most other industries pass on price increases and reductions to new and existing customers equally.

Are you in favor of the corollary, if new mortgage rates increase then the Bank should be entitled to increase the margin on pre-existing mortgages. There's an awful lot of home loans out there on ECB+40bps.....

No, that is not the corollary at all. If a bank agrees a fixed rate or a fixed margin, it should remain.

But if a bank wants to offer tracker margins to new customers who meet certain criteria, then they should offer those to existing customers who meet the same criteria.

- This is just a way to legislate for laziness i.e. people are too lazy to switch. On a 300k loan over 30 years, a 20bps lower margin would save the Borrower 13k. But you say it's time consuming & expensive........

Not at all. Many borrowers cannot switch. Probably around 150,000.

A 20 bps saving on a €300k loan would save a borrower €600 in the first year. With €1,500 or so switching costs, most won't bother switching. But you think it's ok for them to switch to pay €1500 to switch to this lender, only to have their rate increased by 5% immediately afterwards which is what they could do.

If a borrower were switching a tracker to get a reduction in the margin of 20 bps, it would be worth it.

Brendan

 

[Andy836]

1. A borrower can’t switch mortgages if their income or family circumstances have changed and they no longer meet the affordability criteria – suppliers of house insurance do not check a new customer’s affordability

There are other differences between the mortgage and other markets

2. The Consumer Protection Code obliges lenders to treat customers fairly – there is no such obligation on utility providers.

3. It is more difficult for ordinary consumers to understand and compare mortgage deals. Many people simply do not understand percentages. They are unable to incorporate 2% cash back into their mortgage decision. Gas prices are much easier to understand.

4. Most other industries pass on price increases and reductions to new and existing customers equally.

5. Probably around 150,000.

6. A 20 bps saving on a €300k loan would save a borrower €600 in the first year. With €1,500 or so switching costs, most won't bother switching. But you think it's ok for them to switch to pay €1500 to switch to this lender, only to have their rate increased by 5% immediately afterwards which is what they could do.

1. In point 1 above you're basically saying that someone who is of lower credit quality than a new Borrower should get the same rate as that new, higher quality Borrower?
2. THE CPC obliges lenders to treat customers FAIRLY - not equally. At the point the mortgage is taken, the Borrower is being treated fairly.
3. Should these people be allowed take out 30 year home loans if they can't do simple maths?
4. Most other industries only pass on price increases and reductions to new and existing customers when contracts mature - my TV/broadband bill only changes after my existing contract ends, same with my phone bill. The reason these changes occur more often is they're only 12 month contracts while the home loan is a 30 year contract.
5. Most of these probably can't switch because they don't meet the new criteria. If they don't meet the new criteria then why on earth should they get the same rates as new Borrowers who do meet the criteria.
6. I don't buy that at all. Firstly no Bank has raised their SVR rates in recent times. Secondly, if the consumer isn't willing to invest €1,500 now and a few days to switch & save €13k over the life of the loan, then that's their problem. People do spend €20k on insulation and fancy boilers to knock €40 off a monthly utility bill because over 20 years it will save them €25k.

Anyway, we'll agree to disagree. You believe a mortgage is a long term relationship where the terms are ever evolving based on 3rd parties and I think it's a simple once off contract.

 

[Brendan Burgess]

Brendan Burgess said: ↑
1. A borrower can’t switch mortgages if their income or family circumstances have changed and they no longer meet the affordability criteria – suppliers of house insurance do not check a new customer’s affordability

1. In point 1 above you're basically saying that someone who is of lower credit quality than a new Borrower should get the same rate as that new, higher quality Borrower?
5. Most of these probably can't switch because they don't meet the new criteria. If they don't meet the new criteria then why on earth should they get the same rates as new Borrowers who do meet the criteria.

An interesting point. Let's tease this one out a bit.

My proposal is that a lender should be obliged to offer existing customers the same rates on offer to new customers with the same qualifying criteria.

I am all for risk-rating. If a lender introduces a new rate for people who meet 60% LTV and 2 times LTI, then any existing customer who meets those criteria should qualify for it.

Lenders do not price mortgages based on LTI in Ireland. However, if they did introduce such pricing then existing borrowers would have to meet that new criterion.

On a related issue, I don't think I would have a problem with a lender charging a borrower in arrears a higher rate. So if a lender offers a rate of 3% to new <50% LTV borrowers , should an existing borrower who has been in arrears qualify for that rate? Probably not.

So I accept that a defaulting borrower has increased the risk and should not qualify for the clean credit record rate. So has a borrower whose income has dropped since they took out the mortgage increased their risk? Yes. But if they have maintained their repayments despite their lower income, I think that this should trump the lower income issue.

Brendan

 

[Brendan Burgess]

2. THE CPC obliges lenders to treat customers FAIRLY - not equally. At the point the mortgage is taken, the Borrower is being treated fairly.

Fairness is not limited to the sale of the product - it applies to the lifetime of the product.

It's clear to me that offering much lower rates to new customers with the same criteria is unfair, but that is a matter of opinion.

Brendan

 

[Brendan Burgess]

Secondly, if the consumer isn't willing to invest €1,500 now and a few days to switch & save €13k over the life of the loan, then that's their problem. People do spend €20k on insulation and fancy boilers to knock €40 off a monthly utility bill because over 20 years it will save them €25k.

The insulation and boiler is guaranteed to same you money.

With a mortgage, the future pricing is uncertain. I could switch from AIB to BoI today, only to find BoI increasing the rates tomorrow. So, for most mortgages, a 20 bps reduction would not justify a switch. If BoI guaranteed to be always 20 bps below AIB, then it would be worth a switch.

Brendan

 

[jjm]

part of the reason banks gave lower rates to new customers was to get the housing market moving again .This had/has a direct and indirect benefit for both the bank and All of its Mortgage customers .

 

[gnf_ireland]

Apologies for the delay in posting here - I was away for the weekend and missed it.

I disagree with the principle of this proposal.

The idea that lenders (or anybody else) should be prohibited or restricted from offering enhanced terms to new customers is bizarre to me. We don't restrict any other business from making promotional offers to attract new customers - why should the business of lending money be treated any differently?

We should be encouraging, not restricting, competition within the mortgage market.

I know we are going to disagree here @Sarenco but I don't think its as straight forward as you stated above for mortgage lending.

If you compare other products/services which are purchased on an ongoing basis - mainly utilities as a good example - yes they do offer incentives, but these are normally time limited, and once expire everyone falls back onto standard rates. Everyone at this stage is equal. So I sign up to Energia or Airtricity and I get 16% off for 12 months, and then standard rates apply to everyone.
I can then switch to a new provider, or try and get some sort of other deal from my provider, who knows I can switch at will.
If I decide to switch, I can go onto bonkers.ie myself, and have the whole thing done and processed in 15 minutes.
The differences here are:
1. There is no credit risk evaluation to be done and essentially no barrier to entry. I am not sure what reasons the Utility providers can stop be switching, but I understand its very limited.
2. Even if my credit rating has been shot, I can still switch and avail of a pre-pay offering for Electricity and Phone
3. There is no need to get a solicitor or any other 3rd party involved in the process. The time taken is 15 minutes, not 2-3 months
4. These rates are then 'locked in' by enlarge for the next 12 months. I understand in most utilities (Virgin Media is the one I am aware of since I went through the increase only 2 weeks ago), if the Utility then tries to increase the price, they have broken the terms of the contract and you can leave them penalty free.

So yes, I fully understand what you are saying around attracting new business, but in most cases this involves the fixing of rates/prices in a locked in period of a contract. This is a fundamentally different scenario to a mortgage in my personal view.

If you would like to highlight a similar example as to how another industry works like the mortgage lending one, I would definitely be interested in comparing them

 

[gnf_ireland]

I don't agree. Banks should be able to offer products to new customers as they see fit. That is capitalism.

Fair enough for new products - but what about offering the same product at different prices to different customer sets.

I understand if there is a valid reason for it - eg they are more likely to default or have a higher risk profile, but based on date of drawdown is hardly a distinguishing factor to impact cost over a 25 year lifetime of a loan.

 

[gnf_ireland]

- This is just a way to legislate for laziness i.e. people are too lazy to switch. On a 300k loan over 30 years, a 20bps lower margin would save the Borrower 13k. But you say it's time consuming & expensive........

@Andy836 I know what you are saying here, but I do not believe the lack of switching is down to laziness. I think this excuse is bandied about a lot, but not convinced it applies in the majority of cases. As I said on a separate thread, I would like to see a proper study done into the true root causes of people not switching and after that discuss them.

If it does turn out to be laziness, then I guess I will have to eat humble pie on that one !

 

[gnf_ireland]

4. Most other industries only pass on price increases and reductions to new and existing customers when contracts mature - my TV/broadband bill only changes after my existing contract ends, same with my phone bill. The reason these changes occur more often is they're only 12 month contracts while the home loan is a 30 year contract.

6. I don't buy that at all. Firstly no Bank has raised their SVR rates in recent times. Secondly, if the consumer isn't willing to invest €1,500 now and a few days to switch & save €13k over the life of the loan, then that's their problem. People do spend €20k on insulation and fancy boilers to knock €40 off a monthly utility bill because over 20 years it will save them €25k.

On point 4 - the difference with Home Loans is the contract price increases apply immediately to all parties. I would be happy to sign up to a 30 year mortgage contract at x% and then switch if the rates reduced. But this is not the case - the banks can rise it any time they wish, based on any criteria they decide.

On point 6 - true, no bank has increased their SVR rate recently. But what happens when they do. Lets say they decide to increase their SVR or LTV rates for existing customers by 0.25%, and at the same time reduce their new customer rate by 0.5% ? Is that acceptable?
What happens if there ends up a block of 1,000 customers on LTVx for drawdown dates y and they are currently on 3.5%. The bank decides to target them and increases their rate to 4.5% because they can, while charging new customers at the same LTV 3%. Lets say 60% switch, but the other 40% cannot switch because of the following:
- 200 recently changed jobs and although they are on higher salaries they need to be x months in the new job
- 50 have taken a pay cut in the last period of time (or their bonus/commission was reduced) so not as easy move
- 100 have recently had children and the childcare costs impact affordability in the short term
- 50 have missed a payment or some other reason in the last while
I agree that the last group may be penalised under most rules agreed - but the others?

Are we saying everyone has to be 'mortgage switching ready' for the full lifetime of the mortgage to move at a moments notice if needed. So no one should consider moving jobs or having kids in case it impacts their ability to switch?

My issue is simply - over a 25-30 year period very few people will be able to switch at a moments notice at all times during that period. People may not always be able to switch, and that is the issue. Leaving them to the wolves is a bit unfair


BTW, I have no issue in principle with 0.5% off for the first 12 months of a mortgage, defaulting back onto standard base rates. My issue is where different base rates apply to all, or a bank excludes customers from applying for rates on offer - e.g. fixed rates not available for existing customers.

 

[stefg]

The idea that lenders (or anybody else) should be prohibited or restricted from offering enhanced terms to new customers is bizarre to me.

If we referring to a one off transaction I can understand this statement. But a variable rate mortgage is a long term product and the customer understands that the rate may increase or decrease based on the costs or strategy of the bank. But the CPC requires the bank to treat customers fairly and if the bank deems that it can afford to provide lower rates to new customers for identical mortgages then they are discriminating against the existing customers.

We should be encouraging, not restricting, competition within the mortgage market.

This would allow more realistic and quantifiable competition. Some of the incentives offered by banks at the moment are confusing to customers and can appear appealing while not being competitive. I think offering promotional (time limited) rates or discounts for related services like home insurance etc are valid, but distinguishing long term rates between new and existing customers is not fairly competitive.

A home loan is conceptually the same as any other product. You're buying money now and agreeing to pay X for it. The fact that X is a long winded installment definition doesn't change the fact that you're only buying the loan once.

Not quite, you agree to pay X where X may change over time based on the banks determination of costs and competition etc. Now someone else buys an identical mortgage in every way and they are being told to pay a value less than X. This would suggest the banks determination of costs have decreased but they are selectively choosing who the lower rates apply to, this is discriminatory.

THE CPC obliges lenders to treat customers FAIRLY - not equally. At the point the mortgage is taken, the Borrower is being treated fairly.

Fairly = Equally! - "Treating people equally without favouritism or discrimination"

If the CPC is only valid at the point the the mortgage is taken then why does it include rules for the lifetime of the mortgage such as informing customers of rate changes etc. The customer has ongoing obligations to the bank for the duration of the mortgage, as do the bank to the customer.

An important question is if the banks were to be permitted to discriminate between new and existing customers, should they be permitted to discriminate between 2 existing customers?

Consider the scenario where 2 customers may take identical mortgages with identical contracts rates but in the future they raise the rate of one and lower the rate of the other. One customer may have many products from that bank and the other only the mortgage or one customer has fallen in a category that the bank since deem not desirable (this is not referred to in the contract) and in this case they change the rate for 1 of the customers. Is this fair? Is this just the bank being "competitive"?

 

[Bronte]

Switching

I'm not buying the argument that the problem with switching is it's so difficult as a reason for banks to be dictated on what rates they offer their customers.

We had a poster who switched twice in three years. Seemed a doddle to me. I've switched twice myself to get better rates.

I believe in the past, and I can't back this up, that banks were a cartel and kept rates around the same level to stop switching.

There is no early reason why switching can't be made even more easy. And I don't understand why the legal costs of a solicitor are the same as if you were purchaing again seeing as everything was ok legally the first time. That should be looked at.

 

[Brendan Burgess]

Whatever way you look at it, switching mortgages is more time consuming and difficult than switching your energy supplier. It is also more expensive. It is also less certain that you will save as the relative rates of the old lender and new lender may change.

If we want competition, we must facilitate it. And the way to facilitate it is to make rates comparable and to prohibit lenders from competing for new business only.

Brendan

 

[petitverdot]

Switching

I'm not buying the argument that the problem with switching is it's so difficult as a reason for banks to be dictated on what rates they offer their customers.

We had a poster who switched twice in three years. Seemed a doddle to me. I've switched twice myself to get better rates.

I believe in the past, and I can't back this up, that banks were a cartel and kept rates around the same level to stop switching.

There is no early reason why switching can't be made even more easy. And I don't understand why the legal costs of a solicitor are the same as if you were purchaing again seeing as everything was ok legally the first time. That should be looked at.

Sick of hearing people saying "switch banks, its the customers fault we're not creating competition". What other bank will take on someone in Negative Equity.. none.

And on the earlier point, yes I signed a contract with a bank and if a new person gets a better rate then tough on me. I agree if that were a fixed contract, but I signed up to a variable rate. Last time I heard variable wasn't a one way street. Like an earlier poster said, if the variable rate was to rise 1% in the morning do you think the banks would not apply that to existing customers? They 100% would. So it should be the same rule when it drops 1%. Variable: not consistent or having a fixed pattern; liable to change

 

[Sarenco]

If we want competition, we must facilitate it. And the way to facilitate it is to make rates comparable and to prohibit lenders from competing for new business only.

Or we can make switching easier - it can be done in 30 days in Italy at no cost to the borrower. No reason why we couldn't replicate that here.

I happen to think that a diversity of different product offerings is healthy in any market. I don't want the State to dictate what product providers can offer. Choice is a good thing in my book - not something to be regulated away.

Variable: not consistent or having a fixed pattern; liable to change

That's certainly the downside of variable lending rates. I agree that borrowers that are not in a position to refinance their loans are deserving of a degree of statutory protection but that's a different issue.

 

[Andy836]

The insulation and boiler is guaranteed to same you money.

With a mortgage, the future pricing is uncertain. I could switch from AIB to BoI today, only to find BoI increasing the rates tomorrow. So, for most mortgages, a 20 bps reduction would not justify a switch. If BoI guaranteed to be always 20 bps below AIB, then it would be worth a switch.

Brendan

And there in lies the rub. No risk no reward.