BoI cuts cost of fixed-rate mortgages only

Alan McQuaid

Bank of Ireland has taken its first step to comply with Government demands to lower mortgage rates — by cutting a range of fixed-term home loan rates only, but experts say that the Irish lenders continue to charge among the priciest variable rates in Europe.

The lender yesterday announced cuts of up to 0.30% across its fixed-rate home loans, saying that the new suite of rates would be available to both existing and new customers.

That was a key commitment sought by Minister for Finance Michael Noonan when he called in the heads of the banks over a week ago to put pressure on the lenders to reduce their home loan rates.

Bank of Ireland said its one- to five-year fixed rates will now cost between 3.60% and 3.95% and insisted that “for every variable rate customer there is a competitive fixed rate which could save them money.”

It also cut its 10-year fixed rates by 0.30% to between 4.2% and 4.4%.

But Bank of Ireland, along with Permanent TSB and KBC Ireland, continue to offer the most expensive variable interest rates, at 4.5%, and the lenders will be reluctant to substantially cut those rates because it costs them so much money so do so, according to industry experts.

Ulster Bank is the second most expensive with its variable rate pegged at 4.3%, while AIB offers a variable rate of 3.95%, the cheapest in the market.

Analysts say that cutting variable rates is expensive for lenders.

For every 0.25% reduction it is estimated it costs Bank of Ireland €23m annually, AIB €47m and for Permanent TSB as much as €15m, which is particularly expensive given PTSB’s relative size.

“The onus is still on the existing customer with an expensive variable rate to apply for the new fixed rates and do all the paper work,” said Michael Dowling, a leading debt and mortgage adviser.

He said that experience shows that customers, due to inertia, have little inclination to switch financial products and he believes that relatively few will do so.

“What I am hearing is that the banks are not for turning” on variable mortgage rates, Mr Dowling said.

Bank of Ireland said that a €2bn mortgage fund launched last year was now depleted and that it had launched earlier this year a new €2.5bn fund “to meet customer demand for new mortgages”.

However, Central Bank of Ireland figures published yesterday showed that across all lenders that overall mortgage lending continues to contract.

Repayments of home loans exceeded drawdowns by €2.1bn over the 12 months to the end of April, the Central Bank said.

Alan McQuaid, chief economist at Merrion Capital, said the economy will eventually need more credit if all sectors are to benefit from the upswing in economic growth.

“Mortgage approvals data are on the rise but the stricter lending rules from the Central Bank as regards house purchases will likely have a negative impact on borrowing.

“And even with a pick-up in activity, overall bank lending is forecast to remain fairly subdued in 2015, and still well below what the economy needs for sustainable growth in the long-run,” Mr McQuaid said.


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