Time to allow Central Bank to control mortgage rates

Most of the mortgage lenders have now announced rate cuts in response to their meeting with the finance minister.

Before these cuts, the average variable rate for new mortgages was around 4.2%. Afterwards, it has probably fallen to 4%.

The average rate for new mortgages in the eurozone is 2.02%. So, instead of overpaying by 2.2%, we are overpaying by 2%. Welcome as it is, it’s only tinkering. The Irish banks are continuing to fleece the 300,000 non-tracker mortgage holders because they can.

The Central Bank produced an extensive report on the situation and concluded that competition would, in time, sort out the problem. It said it did not want the power to control mortgage rates as it would frighten off new lenders from entering the market. The Central Bank must know that there is no chance that a new lender will enter the Irish market.

First of all, most banks have been repairing their balance sheets over the last few years and have been consolidating in their home markets, rather than expanding overseas. Secondly, the Irish market is just too small to justify a new entrant. As half of the mortgages are on cheap tracker rates and as many of the rest are in negative equity, there is virtually no switcher market.

Thirdly, our collective failure to allow repossessions — where a borrower chooses not to pay their mortgage — is a huge deterrent to any lender considering the Irish market. The basis of mortgage lending is that if the borrower does not pay, their home is repossessed and so the bank gets its money, or most of its money, back.

As long as we are not prepared to face up to this in Ireland, we will not be able to attract new competition into the market and Irish borrowers will continue to pay higher mortgage rates.

Even if the additional 2% margin available here were enough to attract a new lender into the Irish market, it would be of little use to the 150,000 borrowers who cannot switch their mortgage to a cheaper lender.

They include those in negative equity, those who have been in arrears and those whose incomes have fallen since they took out the mortgage initially. These borrowers are completely at the mercy of their lenders. For example, KBC charges existing customers on standard variable rates 4.3%, but will give variable rates as low as 3.5% to new customers. Those existing customers who have a low loan to value and a good income can switch to a different lender, but the majority of their customers can do nothing. They are prisoners of KBC.

Many lenders have stopped lending in the Irish market, including Danske, Bank of Scotland, and ACC. If one of these lenders raises its mortgage rate tomorrow to 6% or 10%, there is absolutely nothing that its customers can do about it. To make matters worse, there is nothing that the Central Bank or the Government can do about it, either.

The only way to stop the cartel of lenders fleecing Irish citizens is to give the Central Bank the power to control interest rates. But what is the point of giving the Central Bank such power when it doesn’t want it and when its priority is to maximise the profits of the lenders? If it had this power at present, it simply would not use it.

The solution is to allow Irish lenders charge up to 3% above the ECB rate without interference. If a lender wants to charge above this rate, then it would have to justify the rate to the Central Bank. Maybe the banks can justify charging above 3% to customers borrowing 90% loan to value. If so, force the banks to make the case and force the Central Bank to actively agree with the justification.

Would a cap 3% above that of the ECB deter foreign lenders? I doubt it. If they are getting 2.02% in their home market, they should not be deterred by 3.05% in Ireland. If it deters lenders who want to charge 4%, so be it.

Brendan Burgess is the co-ordinator of the Fair Mortgage Rates Campaign