Running out of excuses not to cut costly mortgage rates

The interest rate charged to an Irish borrower wishing to take out a new mortgage or to switch mortgage is the highest in the eurozone. The rate is not just a bit higher, it is way higher. The average rate for new business is 3.7% in Ireland compared with 2% across the eurozone.

This means that an Irish borrower with a €200,000 mortgage is paying around €300 a month more than they would be paying in Germany, Spain or France.

How is this justified? Perhaps the reason is that Irish banks have to pay more for their deposits. No, that is not the answer.

Irish banks pay rates equal to or lower than eurozone banks to depositors. It’s hard to credit it — Irish banks charge more for mortgages and pay less for deposits.

Perhaps it’s because the standard variable rate borrowers are subsidising those borrowers with cheap tracker mortgages?

No, that is not the reason either. Contrary to the pleadings of the banks, they are no longer losing money on tracker mortgages.

For example, Bank of Ireland’s average tracker rate is 1.1% and its cost of funds is 0.8%. It is not making huge profits on tracker home loans, but it’s not losing money either.

Perhaps the lenders have to charge more to make up for the bad mortgages issued in the past?

No, this is not a reason either. The lenders have lost money on their mortgages, but they have fully provided for these in their accounts.

In fact, the Irish banks’ reported profits are being boosted by the writeback of excessive provisions they made in the past for bad loans.

The reason Irish lenders fleece Irish borrowers is because they can. There are only a few players in the market and they don’t really compete much.

But if Irish mortgages are so profitable why does some foreign lender not shake up the Irish market? If they can lend at 2% in Germany and France, why don’t they lend at 2.5% in Ireland and make huge profits?

Unfortunately, the mortgage market here is just too small to attract a mainstream foreign lender.

The total size of the Irish mortgage market is around €100bn. Cheap trackers account for about half of that.

A big portion of the remainder can’t switch because they have been in arrears in recent years, or have loan to-value (LTV) ratios in excess of 80%.

The potential switcher market is worth only €15bn to €20bn. Last year, around €4bn in new mortgage loans were issued.

And the process seems to work against new entrants. Aspirants have been waiting several months now for approval. A vulture fund can meantime buy a whole book of mortgages from an existing lender without requiring any Central Bank authorisation or approval.

Even if a new entrant were to enter the market, it’s not going to help existing borrowers who can’t switch due to an impaired credit record, negative equity or an unimpressive LTV ratio.

If a vulture fund were to increase its mortgage rate to 10% tomorrow morning, there is absolutely nothing customers could do about it. It’s not illegal to charge mortgage rates of 10% or even 20% in Ireland. There is nothing the Central Bank could do about it either.

It would probably just repeat its frustrating mantra: “We don’t want to intervene in case it sends the wrong signal to the markets.”

That is why it’s so important that Fianna Fáil’s Michael McGrath’s bill to empower the Central Bank to control mortgages should get into law soon.

It is a measured and balanced response to the current problem.

It requires the Central Bank to periodically review the market. Where it finds the market is dysfunctional, it would have the power to direct a lender to reduce its rates.

I don’t envisage this power would often be used. The lenders would know they would have to stop gouging customers. They would know they cannot offer lower rates to attract new customers while fleecing existing customers. It is a red herring that competitors would be frightened off.

The Central Bank and the mortgage lenders have had plenty of time to get the house in order. It’s time for the Oireachtas to force them to do so.

Brendan Burgess is the coordinator of the Fair Mortgage Rates Campaign.

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