Thursday 29 September 2016

Cutting interest rates on mortgages 'good for banks and borrowers'

Colm Kelpie and Donal O'Donovan

Published 21/07/2015 | 02:30

Some 300,000 people on variable rates have been paying among the highest mortgage interest rates in the eurozone
Some 300,000 people on variable rates have been paying among the highest mortgage interest rates in the eurozone

Cutting the interest rate for standard variable mortgages (SVR) will be good for both the banks and borrowers, a global ratings agency has suggested.

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Fitch said that if banks reduced the costs of home loans, the move would make the debt more affordable for the borrower to service, reduce the stress levels on those homeowners, and increase the chance that the lenders would get their money back.

Some 300,000 people on variable rates have been paying among the highest mortgage interest rates in the eurozone. Banks have come under political pressure to cut their rates and Fitch's analysis will put pressure on the banks to cut their rates even further.

Deal

It comes as AIB announced that it had raised €750m at a yield - the effective interest rate charged to the bank - of just 0.663pc a year.

AIB's five-year bond deal highlights the extraordinary low cost of debt for banks in the markets, driven down by a number of factors including indirect financial support from the European Central Bank.

And yet, borrowers with SVR mortgages are being charged between 3.9pc with Allied Irish Banks, to 4.5pc for KBC and Permanent TSB, according to Fitch.

Standard & Poor's (S&P) has lifted its debt rating for some Irish banks in part because of their return to profit on the back of improved lending margins.

Fitch noted that two lenders have already reduced their SVRs: in March of this year Ulster Bank decreased its SVR to 4.3pc from 4.5pc, while AIB cut its SVR twice, to 4.15pc from 4.4pc in November last year and further to 3.9pc in May. Permanent TSB has also introduced new variable rates without decreasing its existing SVR.

"In addition to these reductions in variable rates, most Irish lenders have already improved the terms of their fixed-rate mortgages, following political pressure to offer more competitive rates," Fitch said.

"In Fitch's view, a reduction in borrowing costs will improve the affordability of mortgages and reduce the stress on borrowers, improving the performance of mortgage pools."

It also said the potential introduction of legislation giving the courts the power to cap SVRs wouldn't affect the ratings of residential mortgage-backed securities.

Fitch pointed out that a cap has been mooted. But the ratings giant did caution that a side effect of the rate reductions would be an artificial increase in reported arrears, as the calculation is based on the overdue amount divided by the payment due in the period.

"As the payment due would become lower following a rate decrease, the reporting could suggest that borrowers have been in arrears for a longer period," Fitch said.

"However, the majority of delinquent loans are already in late-stage arrears; therefore the effect on this artificial increase would be limited on Fitch's analysis of transactions," the agency said.

Irish Independent

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