Sunday 25 September 2016

Variable rates cost '11 weeks of extra work'

Published 03/04/2015 | 02:30

It takes an average of just seven weeks to sell a home. (Photo: PA)
It takes an average of just seven weeks to sell a home. (Photo: PA)
Conor McNally and his daughter Saoirse, age 2 at their home in Clonsilla, Dublin

FAMILIES on variable-rate mortgages have to work almost three months more than those on trackers just to afford the extra cost of their expensive mortgages.

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The revelation comes as Finance Minister Michael Noonan met the Central Bank governor to see if pressure can be put on the banks to lower their punitive variable rates.

The gap in costs is so great between variable rates and trackers that a family will need to earn €12,500 a year just to pay the premium being charged on variables.

The extra cost imposed on families means that a two-parent household will have to work 11 weeks more in a year to pay for it, calculations done by the Irish Brokers Association (IBA) for the Irish Independent show.

Tax

The IBA calculated that a family will need to come up with an extra €6,000 after tax to pay for the cost of a variable.

This is €12,500 before taxes. It will take a couple on average earnings 11 weeks to earn this amount. The average interest rate on a tracker is just over 1pc. This compares with 4.5pc on a standard variable rate.

This difference in rates means annual payments on a €200,000 mortgage works out at €6,000 a year in interest costs alone, according to calculations by Fianna Fáil's Michael McGrath.

Earlier this week, a spokesman for Taoiseach Enda Kenny was unable to outline any plan if the banks refuse to heed his call to reduce mortgage rates.

The IBA's chief executive Ciaran Phelan said this extra cost was a huge imposition on more than 300,000 families stuck with variable-rate mortgages.

And variable-rate mortgage holders here are paying almost 2pc more than the average in the eurozone. A cut of 1pc would save the 300,000-plus families more than €400m in payments, Goodbody Stockbrokers has worked out.

Mr Phelan said: "At the most simplistic level, an average two-parent household will have to work 393 hours more in a year - an extra 11 weeks work between them." He said the IBA's calculations are a crude measure, but capture the huge divisions between the costs for tracker and existing variable-rate mortgage holders.

Finance Minister Michael Noonan and the Central Bank governor met to discuss high variable rates yesterday.

Mr Noonan asked for a report on the profits being made by banks on variable mortgages.

But the Central Bank has not changed its stance that it does not want powers to regulate interest rates. It feels such a move would discourage new mortgage entrants into this market.

A statement issued by the Department of Finance said: "The governor and the minister noted that the standard variable rates charged in Ireland are higher than other euro area countries and have not fallen in line with European Central Bank (ECB) wholesale rates.

"The Central Bank will continue to research why this is the case and will publish results shortly."

Powers

Consumer advocate Brendan Burgess said it was not correct of the Government and the Central Bank to say they can do nothing about high rates.

"If the banks refuse to lower their variable rates, the Government should bring in powers to regulate rates, on the basis that it is an uncompetitive market."

Mr Burgess said the discriminatory treatment of existing variable mortgage holders, compared with tracker holders and new buyers on introductory deals, must end.

He said this was a clear breach of the Central Bank's Consumer Protection Code. The code demands banks treat all their customers equitably.

Q & A: Why the variable-rate issue has exploded

Why all the fuss about variable rates?

Variable rate mortgages are expensive, very expensive compared with the costs for those with trackers and compared with the interest charged on mortgages elsewhere in the eurozone.

Banks stopped offering trackers early in 2009, and most of those who have them have realised they are well worth holding on to.

This newspaper coined the phrase "you would be crackers to give up your trackers". The average interest rate on a tracker is just over 1pc. This compares with 4.5pc on a standard variable rate.

This difference in rates means annual payments on a €200,000 mortgage are at least €4,000 a year more for the variable customer compared with the tracker rate.

If you look at the interest costs alone, and leave aside the capital payments made over a year, the difference is €6,000, according to Fianna Fáil's Michael McGrath.

And variable rate mortgage holders here are paying almost 2pc more than the average in the eurozone.

Why are the rates different?

Tracker rates and variable rates used to be pretty much indistinguishable. But after the financial collapse the cost of funding these mortgages shot up.

Banks found that tracker contracts had water-tight terms stopping them changing the rates charged unless the European Central Bank (ECB) rate changes.

But with variables they got away with decoupling the rates charges from the ECB rate.

This allowed them to use variable rates to make up for losses in other parts of their business.

Why is this an issue now?

The Irish Independent has been writing about the discriminatory treatment of variable rate mortgage holders for ages, but a private members' motion proposed by Fianna Fáil Michael McGrath has put the issue into the headlines.

This newspaper discovered, with the help of Brendan Burgess of Askaboutmoney.com, last summer that the mortgage rate figures for this market, compared with the rest of the eurozone, issued by the Central Bank distorted the rates here. The Central Bank has since altered how it presents the figures, which shows that variable rates here are among the highest in the eurozone.

The information has been absorbed by homeowners who realise they are being royally ripped off to cover the lenders' losses on trackers, mortgage arrears and defaults, and crazy boom-time commercial lending.

I hear Noonan and Honohan are meeting. Can they do anything?

Taoiseach Enda Kenny and Finance Minister Michael Noonan started the week saying there was nothing they could do about high variable rates.

This is despite calling in the banks for a dressing down soon after coming to power in 2011, and getting AIB to drop its rates.

Mr Noonan continues to insist that the setting of variable rates is a commercial decision for banks, even though we own two of them.

However, Mr Noonan made a concession on Wednesday night and said he would discuss the issue with Central Bank Governor Patrick Honohan.

Don't expect much. The official responses from both the Department of Finance and the Central Bank is that non-intervention is the preferred policy.

But what about the legal challenge to high variable rates?

Banks face having to slash variable rates and compensating thousands of homeowners.

The nightmare scenario for the banks arises from a case heard in the Court of Appeal in February, over Danske Bank hiking its variable rates at a time when eurozone rates are near zero.

The judges reserved their judgment, which means they will provide a written decision at some unspecified date. If the judges confirm an earlier High Court decision and come down in favour of the Millars couple involved in the case, most banks are likely to be forced to cut variable rates.

Irish Independent

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