Michael Dowling: Banks are misleading customers with costly cashback mortgage incentives
The three banks offering the cashback incentives have one thing in common: They also have the dearest interest rates in the Irish market, for both variable and fixed rates.
Irish mortgage interest rates have gone back to being the dearest in the eurozone and we need to focus on immediate changes that can be made to reduce borrowing costs for both new and existing mortgage customers
In January, the average mortgage interest rate in Europe was 1.29%, which compares with 3.35% in Ireland.
That means an Irish borrower contemplating taking on a mortgage of €250,000 and paying it off over 30 years will pay €190 per month more than borrowers who do not avail of the incentives.
The Irish borrower will pay an additional huge amount of €68,000 in interest payments over the lifetime of the loan.
The banks' industry group, the Banking and Payment Federation Ireland has argued that there are two main factors influencing the higher cost of mortgages in Ireland.
It argues that Irish banks, as a result of the banking crash of over a decade ago, must hold three times more capital than their European peers.
The banking industry also highlights the length of time it takes to repossess a property in Ireland when a borrower is in default.
However, the banking industry never puts its focus on another cost and one in which it would have a case to criticise some of its own member banks, namely the costs of cashback incentives.
There are three banks offering cashback incentives — Bank of Ireland, Permanent TSB, as well as the AIB-owned EBS.
It is notable that two of the cashback mortgage providers are majority-owned by the State.
All three of the mortgage lenders offer borrowers a payment of 2% of the mortgage amount within 40 days of completing the mortgage agreement.
It is worth signalling up a further eye-catching way some lenders operate the cashback incentives.
Bank of Ireland and EBS offer an additional 1% incentive in year five if the borrower stays with the lender and doesn't switch business to a rival.
It's an incentive that effectively undermines the whole idea of promoting switching.
The three banks offering the cashback incentives have one thing in common: They also have the dearest interest rates in the Irish market, for both variable and fixed rates.
It is interesting that the three latest entrants to the market, Avant Money, ICS Mortgages, and Finance Ireland have one thing in common: They have the cheapest variable and fixed rates and offer no cashback incentives, and simply compete on price.
Those of us who monitor the mortgage market carefully, have suggested that the cost of the cashback incentive is between 0.4% to 0.5%.
It is noteworthy that one of the cashback lenders last week introduced a four-year fixed-rate, but without the cashback incentive, and its interest rate is up to 0.45% cheaper.
Another of the banks which offers cashback incentives also has a fixed interest rate that is 0.4% cheaper if the borrower does not avail of the cashback incentive.
So, the case has been proven that the cost of the cashback is 0.4% at least.
In simple terms, this means that the three banks who offer the cashback incentives could overnight reduce the interest rate by this amount.
On a mortgage of €250,000 over 30 years, a reduction of 0.4% would cut the monthly repayments by €52 and save €20,000 in interest costs over the lifetime of the loan.
We should note the words of Central Bank governor Gabriel Makhlouf who told an Oireachtas committee in 2019 that there was a need for banks to make the terms on which cashback mortgages are offered to be clear and transparent because consumers rarely "get anything for free”.
I would argue that the existence of the cashback incentives in mortgages is a form of dual pricing as existing customers cannot avail of such incentives.
I am calling on the Competition and Consumer Protection Commission to investigate cashback mortgage incentives and other incentives in the mortgage market.
I do not believe consumers understand what they are being sold.
Consumers certainly do not understand the long term costs of the incentives.
They will ultimately pay by being charged a higher interest rate over the term of the mortgage.
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