Most variable rate mortgage holders could save by switching

As many as 80 per cent of borrowers currently on standard variable rate (SVR) mortgages could save money by switching to alternative products, according to the Central Bank.

Speaking at a session of the joint committee on finance, public expenditure and reform on Thursday, Ed Sibley, director of institutions at the Central Bank, noted the level of switching by mortgage customers has more than halved in recent years, from a high of 20 per cent to 8 per cent currently.

“Switching has collapsed in recent years, partly due to the high level of trackers and also because of the level of differentiation in the market,” he said.

"The vast majority of SVR borrowers in positive and negative equity could benefit from either switching to another provider or to another product with the same provider," Mr Sibley said.

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Benefits of switching Mr Sibley agreed

consumers needed to be reminded of the benefits of switching.

“The more people who start to switch, the less the ability the banks will have to differentiate between new borrowers and existing,” he said.

The average standard variable mortgage rate in Ireland is currently 3.6 per cent in Ireland, while the figure across the euro zone is 2 per cent. However, the governor of the Central Bank, Philip Lane, recently ruled out any legislation to curtail interest rates, arguing it could deter potential market entrants and change the nature of the market as banks focus on "super-safe" customers.

A 2015 survey from the Competition and Consumer Protection Commission (CCPC) showed that just 2 per cent of mortgage holders have actually switched in the past five years.

Appearing before the committee to discuss the Central Bank Variable Rate Mortgages Bill, which was proposed by Fianna Fáil and passed in the Dáil without a vote earlier this year, Mr Sibley refused to say whether variable rate consumers here were being actively discriminated against.

Noting the difference in rates, he said the mortgage market in Ireland was considerably different to that elsewhere in the euro zone.

“If we look at the levels of default in Ireland they are up to 10 times higher than elsewhere . . . Credit risk in Ireland is very elevated,” he said.

The Central Bank Variable Rate Mortgages Bill, which is intended to tackle excessively high rates, was supported by Sinn Féin, Labour, People Before Profit-AAA, the Social Democrats and some Independents.

However, Minister for Finance Michael Noonan has previously described the Bill as being "seriously flawed".

Alternative products

Mr Sibley said the situation for mortgage borrowers had improved somewhat in recent years as more lenders begin to offer alternative products.

“There is an ability for borrowers to save money on their mortgage today. Eighty per cent could swap today and save tens of thousands on the cost of their loans,” he said.

Speaking before the committee, Mr Sibley said that while the mortgage market is recovering, it is still suffering the effects of the economic crisis that beset Ireland.

“Mortgage arrears have fallen for 12 successive quarters and by 43 per cent from peak, with more than 120,000 mortgage holders having their loans restructured,” he said. “Nonetheless, mortgage lending is evidently riskier in Ireland than other euro zone countries.”

Unjustifiable rates

Speaking after the committee meeting, Fianna Fáil’s finance spokesman Michael McGrath said Irish consumers have been left exposed by the Central Bank’s lack of powers over mortgage interest rates and that variable rate customers continue to be charged rates that are “unjustifiable”.

“Interest rate caps are already in place in Ireland in relation to Credit Union loans and lending by licensed moneylenders. The ECB has informed us that a series of countries across the EU have restrictions in place on the maximum interest rates that can be charged on mortgages. Given that Irish variable rate customers continue to pay well over the odds on their mortgage rate, such restrictions are urgently required in Ireland,” he said.

“Mortgage lenders in Ireland should avail of the opportunity now to reduce rates further to better reflect current market conditions including the very low cost of funds they enjoy,” Mr McGrath said.