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Sunday 4 December 2016

Bank of Ireland to be forced into big mortgage rate cut

Published 11/05/2016 | 02:30

AIB surprised market watchers by announcing a reduction in its variable rate to 3.4pc on the first full day of the new Government (Stock picture)
AIB surprised market watchers by announcing a reduction in its variable rate to 3.4pc on the first full day of the new Government (Stock picture)

Bank of Ireland is set to be forced into big mortgage rate cuts.

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The Richie Boucher-run bank could reduce its variable rate by a total of 0.5pc by the end of the year. The move by its rival AIB to reduce its variable rate has widened the gap in home-loan rates to 1pc between the two lenders.

However, interest-rate reductions will weaken shareholder value in State-supported banks, according to banking expert Darren McKinley of Merrion Stockbrokers.

The analyst said the variable rate cut by AIB and its €2,000 cash offer to switchers had made Bank of Ireland's product offerings look very unfavourable.

He said that some of AIB's variable rates are down to 3.5pc, compared with 4.4pc at Bank of Ireland.

"We would expect Bank of Ireland to follow suit in due course with variable rate cuts, but we also feel that the circa 25pc decline in Bank of Ireland's share price year to date more than prices in a 50bps cut in variable rates over the next 12 months," he said.

Reducing rates to match AIB will decrease Bank of Ireland's operating profit by €20m on its €8bn variable mortgage rate.

AIB surprised market watchers by announcing a reduction in its variable rate to 3.4pc on the first full day of the new Government.

Benefit

The new lower rates will benefit some 79,000 mortgage holders. It will mean annual savings of €320 for someone with a €200,000 mortgage to be paid back over 25 years.

However, the rate cut did not apply to an estimated 80,000 customers of EBS and Haven. But the expectations are that reductions will be announced for these customers in days.

KBC reduced its variable rates by 0.10pc for new customers only, and said existing mortgage holders could move on to new lower fixed rates.

It will cost Permanent TSB €17m to match variable rate cuts by AIB, Mr McKinley has calculated.

The variable rate at Permanent TSB is 0.7pc higher than AIB's, and the bank has a huge variable rate mortgage book relative to its size.

Permanent TSB has €7bn in variable rate mortgages.

Both Fianna Fáil and Sinn Féin are set to introduce bills in the Dáil giving powers to the Central Bank to direct banks to lower their variable rates.

Some 300,000 people in this country pay variable rates that are almost 2pc higher than the average in the rest of the Eurozone.

This costs the average boom-time buyer some €2,500 a year in extra payments, compared with the Eurozone average.

Irish Independent

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