New mortgage rates are cruellest cut for existing borrowers

The new year was less than a week old when Bank of Ireland and Permanent TSB lowered some of their mortgage interest rates.

In PTSB’s case, cuts of up to 0.42 per cent in variable rates will be applied from January 12th to new customers and those on existing “managed” variable rates (MVR). But not to those on the more commonly used standard variable rate (SVR).

PTSB’s standard variable rate book is about €7 billion compared with €700 million in MVRs so it is clear who the losers are in this move.

In Bank of Ireland’s case, the variable rate is being cut for new customers depending on the loan-to-value ratio. Revised fixed rates are also being introduced for new and existing customers. The bank argues the fixed rates offer good value to existing SVR customers.

The cuts are not before time. Rates that were well above 4 per cent at a time when the European Central Bank’s key rate was just 0.15 per cent were a rip off.

They were explained away by the banks as necessary to help them return to profit after the economic crash left them nursing big losses on their tracker mortgages while also having to pay higher rates themselves to secure funding. It was part of the price we had to pay to save the banks, as if €64 billion wasn’t enough.

Competition

These latest moves by Richie Boucher and Jeremy Masding were driven by competitive pressures, pure and simple. Last October, AIB put the cat among the pigeons by announcing cuts of 0.25 per cent to its standard variable rates, to take effect in December. There were more than a few raised eyebrows at the fact that AIB applied the cuts to both new business and its existing book of customers on standard variable rates.

Ciarán Callaghan, a banking analyst with Merrion Capital in Dublin, estimated a hit to AIB's profits of €40 million by applying the lower rates to its back book.

AIB returned to the black in the first half of the year with a knockout profit that was ahead of market expectations. So it could perhaps afford to give something back to its hard-pressed existing mortgage customers while simultaneously putting it up to its competitors in a market that has been reduced to five players. It would also have curried favour with its political masters.

It certainly went down well with the Oireachtas finance committee in December when the four biggest banks – AIB, Bank of Ireland, Permanent TSB and Ulster Bank – discussed their mortgage arrears and their progress in other areas. AIB, which is 99.8 per cent owned by the State, was star boy in the class with the committee.

AIB’s rates move arguably had more impact on fellow State-owned institution PTSB.

Profit

Bank of Ireland is back in profit and largely out from under the skirt of the State. A substantial portion of its business is also in the UK so it is not wholly reliant on Ireland for its profits. PTSB is still loss-making and is not expected to return to the black as a group until 2017. Its tracker mortgages provide a €75 million drag on a business that generated income of just €250 million in 2013.

PTSB has spent the past two years trying to persuade people that it has a viable business model, arranged around personal lending, current accounts and deposit-taking. Its share of new mortgage lending last year is put at about 13 per cent share, which probably puts its lending at above €400 million for the period.

Approval

It has still to receive approval for its restructuring plan from the European Commission and is also in the middle of raising capital with private investors to help plug a gap in its regulatory funding identified in the European Central Bank's stress tests last year.

The business is very much still in transition and the timing of this interest rate cut isn’t exactly ideal for the company. But there is a more fundamental point at play here. By offering special rates for new business, the banks are implementing a tiered structure into the mortgage market and effectively turning their backs on those who have been customers of the banks for years.

David Hall, co-founder of the Irish Mortgage Holders Organisation, reckons there are now four tiers to the home loans market – new business availing of the lower rates, existing customers paying higher SVRs but not in arrears, existing customers paying higher SVRs and in some form of difficulty, and those with tracker mortgages, who are happily pegged to the ECB's record low current rate.

‘Pathetic’

Irish MEP Brian Hayes has been campaigning for the past number of months on what he believes are rip-off mortgage rates here. In his view, it's "pathetic" that more than 200,000 SVR customers are being excluded from benefitting from the lower rates by certain banks here.

“Those lower rates are a million miles removed from those being charged in other euro zone countries,” he said. “It’s holding back a group of people who need to start spending again.”

Hayes is lobbying the ECB on the matter.

The banks might argue that this is normal business practice and point to the fact that health insurers and pay-TV companies often market special rates to new customers that aren’t available to existing ones. But it could also be argued that this is yet another example of the banks riding roughshod over a large cohort of their customers, who in most cases can’t do a damn thing about it. Twitter: @CiaranHancock1