Monday 5 December 2016

Noonan's blushes spared as competition sprouts organically

Published 26/10/2016 | 02:30

Central Bank Governor Philip Lane does not want powers Picture: Bloomberg
Central Bank Governor Philip Lane does not want powers Picture: Bloomberg

The move by KBC Bank to raise the competitive bar in the mortgage market could save Michael Noonan's blushes.

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This is because the decision of KBC to cut its mortgage interest rates for new and existing buyers heralds a new front in the mortgage price war.

It comes at a time when politicians are debating a controversial bill in the Oireachtas that aims to give powers to the Central Bank to regulate mortgage rates.

About 300,000 homeowners are on variable rates, which are around 1.5pc higher here than in other eurozone countries.

Variable rates have fallen only slightly in the last year, after lenders stepped back from cutting rates once initial pressure from politicians died down.

But pressure on rates is on again. A bill is going through the Dáil to give powers to the Central Bank to regulate mortgage rates.

The Finance Minister has spoken against it, and Governor of the Central Bank Philip Lane does not want these powers, even though consumer advocates like Brendan Burgess argue that there is a clear market failure.

Mr Noonan told TDs and senators last week he would prefer to allow competition bring rates down. The bill is likely to become law, but his prayers may have been answered if banks cut rates and the powers in the new legislation do not have to be used.

If banks, spurred on by the likes of KBC Bank, get into some serious variable and fixed-rate mortgage reductions, then Messrs Noonan and Lane will be spared embarrassment.

A proper level of competition on rates, rather than a focus on gimmicky incentives like cash-back offers, would save new buyers, switchers and existing customers a fortune.

This would make it unnecessary for the Central Bank to use the powers it is getting to force rates down.

With a mortgage market share of around 12pc, KBC needs to put it up to the others, especially market leaders AIB and Bank of Ireland.

The KBC rate cut comes at a time when there is a scramble among lenders to sign up first-time buyers.

This is a segment that is set to have extra financial fire power from the Government's help-to-buy scheme.

Davy Stockbrokers reckons the incentive scheme will benefit 5,000 of them.

New buyers are being besieged by cash-back offers, funds to pay for conveyancing, and home insurance discount deals.

KBC is the latest to base its interest rate pricing on how much you are borrowing relative to the value of the home. For existing borrowers, the same concept applies - you get a lower rate if you have a low loan-to-value ratio.

The best advice for anyone confused by all of this is to use a broker.

Existing borrowers should contact the bank, or use the mortgage calculator at consumerhelp.ie.

Irish Independent

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