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If banks don't act on mortgage rates, Noonan must

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People are feeling the impact of loan rates

People are feeling the impact of loan rates

People are feeling the impact of loan rates

PRESSURE is increasing on banks – particularly Bank of Ireland – to slash their extortionate variable mortgage interest rates.

This is because AIB, which recently began writing down some mortgages, is preparing to announce a major cut in the interest rates paid by some of its homeloan customers who are in arrears.

This could see the interest rate paid by some of AIB's variable rate customers slashed from the current 4.57pc to just 0.5pc. Such a move would knock €400 off the monthly repayments on a €200,000 mortgage.

While any move to cut variable mortgage rates is welcome, why is the rate cut confined to customers in arrears? And why is AIB the only bank cutting homeloan rates?

Traditionally Irish mortgage variable interest rates were closely linked to official ECB interest rates. If the ECB cut rates, the Irish banks moved quickly to reduce their variable rates. When Frankfurt raised rates, Irish mortgage rates quickly followed suit.

This relationship between Irish mortgage rates and official ECB interest rates broke down in the aftermath of the 2008 bank guarantee.

As the full extent of the Irish banks' bad loans emerged, depositors became extremely reluctant to trust them with their money.

With large chunks of their mortgage books tied up in trackers, which are contractually tied to official ECB rates, the Irish banks have been jacking up the interest rates which they charge customers unlucky enough to be on variable rates.

Bank of Ireland's basic variable mortgage rate is now 4.5pc, while AIB customers are paying 4.57pc. This compares with the current official ECB interest rate of just 0.25pc.

That's a gap of 4.25pc-4.32pc, about three times the typical 1.25pc-1.5pc differential between official ECB interest rates and Irish variable mortgage rates during the Celtic Tiger years.

While the Irish banks could, just about, justify gouging their variable rate mortgage customers during the dog days of 2010, 2011 and early 2012, this is no longer possible.

DEPOSITS

As investor sentiment towards Ireland Inc. has improved, the Irish banks now need to pay much lower interest rates to attract deposits.

The lower interest rates they are now having to pay depositors is rapidly feeding through to bottom lines.

This is particularly true of Bank of Ireland. The bank's most recent results show that it recorded a net interest margin – the difference between what it received in interest on all of its loans and paid in interest on all of its deposits – of more than 2pc in the second half of 2013.

With new loans, including mortgages, now as scarce as hens' teeth and only a handful of lenders left in the market, the banks can charge pretty much what they like.

This is of course making an already bad situation, about a third of all mortgages are in arrears and/or have been restructured, even worse.

Piling sky-high interest rates on borrowers mired in negative equity struggling to meet their monthly mortgage repayments is not the way out of the mortgage arrears crisis.

Now that the banks are paying less for deposits, some of these savings must be passed on to hard-pressed variable rate mortgage customers.

If the banks don't move to cut rates for all of their variable rate mortgage customers the Government must force them to do so. Over to you Mr Noonan.


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