What does capping the SVR rate really mean?

[gnf_ireland]

With Senator Quinn proposing legislation to give the Central Bank the power to cap SVR mortgage rates, is the proposal to simply get rid of the concept of SVR's (where the customer is at the mercy of the bank) or simply redefining SVR's to effectively be trackers on ECB or EURIBOR ?

What would one of these new "SVR's" look like? Would it be based at say 2% above ECB/EURIBOR and discounts applied for LTV/LTI ratios ?

With both the ECB/EURIBOR having floated around 5% historically, this would cap SVR rates at around 7%. Do people believe this would be fair ?

Also, if EURIBOR was to be used and it changes daily, how would this be 'calibrated'? Would it be baselined every quarter to reflect the average rate over the previous 3 months ?


I am still in favour of this approach, as opposed to being at the mercy of the banks, as I believe the banks will increase the SVR rates with each and every ECB rate over the next while in any event

What do others think?

 

[Brendan Burgess]

Hi gnf

I have not seen the bill. I have emailed him asking for a copy.

I would like to see the Central Bank being given the power to put a cap on mortgage rates for the family home. However, I would hope that they would not have to use it.

If Danske or any other bank increases the rate to 10% tomorrow, then there is nothing that the Central Bank or the government can do.

It would not be easy to design such a cap. A simple cap could be ECB + 3%. But then there would be no lending at 90% to first time buyers. So maybe the cap should be varied according to the Loan to Value?

Let's say the cap was ECB + 4% for LTVs over 80%. That would probably drive the sub-prime lenders out of the market. I think that sub-prime lending has a role to play. If someone missed a few payments on their credit card three years ago, should they be barred from buying a house until their ICB record is cured? I don't think so. But I don't want to see them being charged 10% either.

I think that the legislation should not specify the cap or the system. It should give the Central Bank the powers to set maximum mortgage rates if they consider it is necessary where the market is not functioning properly. It would be up to the CB to design the caps and how they should be implemented.

Should all mortgages be linked to a particular benchmark?

It is wrong for Bank of Ireland to be charging 4.5% when their cost of funds is 1%.

Let's say we set the maximum rate at cost of funds +2.5% , so Bank of Ireland could charge up to 3.5%.

But the cost of funds varies from bank to bank. AIB's cost of funds is 1.5%. So they would be allowed to charge up to 4%?

Or do you oblige lenders to specify their margins at the start of the loan? For example "we will not charge you more than cost of funds + 3%". They can set their own cap of 10% if they like. And it would be up to the borrower to choose another borrower if they didn't like that.

But the problem today is that there is no competition so the mainstream lenders are gouging borrowers because they can.

 

[Sarenco]

But the problem today is that there is no competition so the mainstream lenders are gouging borrowers because they can.

Well there is certainly competition in the switcher market.

However, I am inclined to agree that variable rate mortgage holders in negative equity (and therefore unable to refinance) are in a somewhat vulnerable position and some form of legislative protection is warranted.

Perhaps the easiest way to achieve this would be to make it an offence to charge interest on any home loans at a particular percentage above the average market rate for new loans. Effectively rates would then be legally capped at, say, 125% (or whatever rate is considered appropriate) of the new lending rate as determined by the Central Bank for the purposes of completing their statistical returns to the ECB. This would be easy to calculate, transparent and would not adversely impact competition within the mortgage market.

I am also conscious that your on-going issue with the methodology used by the Central Bank in calculating the new lending rate would actually work in favour of SVR mortgage holders!

 

[Brendan Burgess]

Hi Sarenco

It would be easier to insist that banks offer new products to existing customers who meet the criteria.

Any legislation would have to exclude trackers from the calculations of "average rates"

Brendan

 

[Sarenco]

Hi Sarenco

It would be easier to insist that banks offer new products to existing customers who meet the criteria.

Any legislation would have to exclude trackers from the calculations of "average rates"

Brendan

Hi Brendan

Surely that proposal wouldn't help protect borrowers in negative equity or with reduced disposable incomes (i.e. they wouldn't meet the criteria for the new products)?

You could certainly exclude restructured tracker mortgages from the definition of "new lending" or you could simply increase the percentage cap to, say, 133% to achieve broadly the same result.

My point is really that any change should provide protection to borrowers that need it while having the minimum possible impact on competition in the mortgage market. Forcing lenders to offer new products to existing borrowers would have an obvious adverse impact on competition and would disincentive new lenders (or capital) from entering the market, which is so obviously required.

The rationale for any legislative change surely should be consumer protection and not placing undue restrictions on desirable competition within the market.