Irish cashback mortgages 'costing least knowledgeable many thousands'

TCD professor Michael King said Irish interest rates are higher across all cashback products compared with Britain and Canada. Picture: iStock

Irish banks are offering among the most expensive cashback mortgages that end up costing the least knowledgeable borrowers many thousands of euro over the lifetime of their loans, a leading expert has warned.

TCD professor Michael King said Irish banks continue to sell cashback mortgages to the least financially literate, who end up missing out on lower-cost home loans that don't lure borrowers with cash incentives. 

Citing his joint research updated in 2019, Prof King said Irish interest rates are higher across all cashback products compared with Britain and Canada. 

The original research by Prof King and Anuj Pratap Singh,
Conned by a Cashback? Disclosure, Nudges and Consumer Rationality in Mortgage Choice found financial products offering a cashback cost consumers much more in the long run.

In Ireland, cashback mortgages were about €32,200 more expensive over 30 years for a €300,000 home loan with a 86% loan to value ratio.

The research also put the spotlight on the prevalence of cashback mortgages here. 

It found that some sort of cashback incentive was used in 54% of all mortgage products offered in the UK, 51% in Ireland, and 44% of home loan products available in Canada.

Lower financial literacy

Prof King said their research showed that people who chose cash backs have lower financial literacy and were less likely to do challenging paperwork.

They were also less likely to switch to lower interest rates during the term of the loan, according to the research.  

A small minority of "sophisticated" borrowers can take advantage of cashback mortgages by switching, he said, but this means the more knowledgeable are being subsidised by less sophisticated consumers.

There is a growing focus from the financial industry that investigating cashback mortgages is not a major priority of Irish regulators, including the Central Bank.

Those concerns have grown as the limited competition in the Irish mortgage market, which already has among the most expensive home loans in the eurozone, is set to diminish further with the exit of Ulster Bank from the banking market in the Republic.                  

Leading mortgage broker Michael Dowling has called for the Competition and Consumer Protection Commission to investigate cashback mortgage incentives and other incentives in the mortgage market.

Long-term costs

Mr Dowling has said he does not believe consumers understand what they are being sold and the long-term costs of the incentives.

Financial consumer advocate Brendan Burgess of the Askaboutmoney website had called for cashback mortgages to be banned. 

Prof King said the "Conned by Cashback" research provided "strong evidence that advanced disclosure improves financial decision-making of customers and that negative nudges, or advertising, encourages prospective buyers into more costly mortgages". 

"We also find evidence that consumers who demonstrate limited attention bias choose more expensive cashback mortgages that are financially equivalent at the point of drawdown," he said.