Tuesday 24 April 2018

High time lenders slashed interest rates

Brendan Burgess

An Irish family with a standard variable rate mortgage of €200,000 is paying on average 4.2pc interest. In the rest of the eurozone, the average interest rate is 2.09pc. So 300,000 Irish borrowers are paying around €350 a month more interest than they would be paying if their mortgage were in another country.

The impact of this on families is huge. For all of those affected, it means that they have less to spend on the other normal living expenses.

Many are not able to afford the extra €350 and will have to extend the term of the mortgage. The extra payment is going in interest when it should be going to repay capital. Others will be pushed into arrears. And in some cases, the difference will be big enough to make their mortgage unsustainable, which could lead to the borrower losing their home.

It's one thing for a borrower to lose their home because they have deliberately decided not to pay their mortgage.

But it's quite another for a borrower, who is paying what they can, to lose their home due to an unacceptably high interest rate.

The lenders argue that the rates are justified by the high cost of funds in Ireland. This may have been the case a few years ago, when the Irish banks had to pay very high deposit rates and when they had to pay for the deposit guarantee.

But this argument no longer stands up. Bank of Ireland's cost of funds is 1pc while its standard variable rate is 4.5pc.

This is gouging - pure and simple.

It's interesting to compare deposit rates and mortgage rates north and south of the Border. For example, for a two-year fixed-term deposit, Bank of Ireland pays its Northern customers 1.6pc - whereas it pays its customers in the Republic 0.9pc. But it charges a borrower who fixes their mortgage rate for two years 2pc in the North and 3.8pc in the Republic.

So in the Republic, the bank pays lower rates for deposits and charges higher rates for mortgages.

The lenders will also argue they have higher losses due to arrears in Ireland than anywhere else in Europe. In Denmark for example, there is an enforcement court which makes sure that if someone misses a mortgage payment, they will be out of their home within six months. As a result, borrowers take their mortgages seriously.

In Ireland, it is very expensive and time-consuming for a lender to enforce their security. Some borrowers exploit this, which has resulted in somewhere around 20,000 borrowers deliberately defaulting. So maybe there is some justification for charging higher mortgage rates to riskier, higher loan-to-value mortgages. However, there is very little risk in lending at 60pc loan-to-value, so there is no justification in charging these borrowers higher rates.

The real reason why Irish mortgage lenders fleece their customers is because they can. In the Republic, there is a cartel of five mortgage providers who don't bother to compete with each other. In the North, there are 25 lenders in a very competitive market. The Minister for Finance has asked the Central Bank to study the reasons for the higher mortgage rates in Ireland. He is going to talk to the chief executives of the five lenders about their high rates. Earlier this month, AIB announced a token cut in their mortgage rates of 0.25pc. While the Central Bank is studying, and the Minister is talking, the borrowers will continue paying an additional €350 per month.

Brendan Burgess is a consumer activist who has put together a group which is fighting for lower standard variable rates. For more information, visit askaboutmoney.com

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