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Friday 9 December 2016

No matter what happens, the banks will take the credit

Karl Deeter

Published 12/04/2015 | 02:30

TAKING CREDIT: Mortgage rates will fall, but it won’t be because of political pressure
TAKING CREDIT: Mortgage rates will fall, but it won’t be because of political pressure

Putting pressure on the banks to drop their standard variable rates is admirable, and as always they will ignore these calls and do as they please.

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To see the Minister of Finance (who has no power or authority to do anything about loan pricing) going to meet the Central Bank governor (who has no power or authority to do anything about loan pricing) to discuss this is like watching Kasparov playing chess with a pigeon.

The outcome doesn't matter.

Equally the politicians calling for 'action' are getting in the same queue - to be the ones to take the credit when mortgage rates drop.

They will drop, but the banks will take the credit it for it. Ultimately it will be their 'decision', but it is a decision being forced upon them by market forces.

Here's the surprise news, rates are going to drop irrespective of these things, not faster, not because of them, but independently and in spite of them.

This trend has already started, it began about a year ago, it just went largely unnoticed.

There are several reasons for this, which will come as a comfort to the owners of the 250,000 or so mortgages on standard variable rates.

The first reason is we are in a low-rate environment, the euro-yield curve (the market pricing of money) is negative a full six years into the future. That means getting a 1pc margin on a mortgage starts to look good by comparison.

The bond market isn't much better, with sovereign bond yields through the floor (with the exception of Greece). Meanwhile, there was about €60bn in asset-backed securities placed with the ECB between October 2014 and this March.

Now with QE they'll be doing that every month.

Margin anywhere will become attractive, and that means mortgage competition.

Added to this you have lenders re-entering the intermediary market - a sure-fire sign they want market share. And to gain that share they'll need lower prices.

Ulster Bank is back and it means business. Just last week it sent out its new appointments to meet a select number of the nation's top mortgage brokers.

Bank of Ireland, which is locked out of dealing with brokers as part of the Troika agreement, will be dropping prices to maintain its market share, and the existing pool of lending, known as the 'switcher' market, is also full of incentives to shift a loan and save.

This pricing is already showing up on new lending at lower loan to values. And in many cases people who are upset with their current provider's rate could switch and save (but many don't - they simply want to do nothing and get the lower price).

We also have a higher demand for housing than we can currently meet, that is why price appreciation has been higher in three months than it ought to be for a whole year, a good portent for lending.

Taken all together these signs point to the same destination, the land of cheaper credit.

Karl Deeter is compliance manager at Irish Mortgage Brokers www.mortgagebrokers.ie

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