The exit of KBC Bank from Ireland will be a huge blow for their customers and their mortgage customers in particular. KBC's rates were the lowest in the Irish market. Now they are selling their mortgage book to Bank of Ireland which has the highest mortgage rates.
For example, a KBC customer with a 90 per cent loan-to-value mortgage is paying a variable mortgage rate of 3.3 per cent. Bank of Ireland charges its customers 4.5 per cent for the same mortgage. On a mortgage of €300,000 over 20 years, the Bank of Ireland customer will pay about €45,000 more than they would have paid with KBC.
The Minister for Finance Paschal Donohue is technically correct when he says that the rights of mortgage holders are fully protected. But he forgets to point out that the rights of the lenders are fully protected as well.
Bank of Ireland will have the right to charge their non-tracker customers whatever rate they want. So, they can charge the customer an additional €45,000 if they so wish. And I doubt that Bank of Ireland is buying the KBC mortgages, because it wants to reduce the rates.
A similar story is playing out with Ulster Bank and Permanent TSB. Ulster Bank competed with KBC on low rates while PTSB competes with Bank of Ireland to charge the highest rates in the market.
While Irish banks have a lamentable record in their treatment of customers, the two banks who are leaving are the least worst. Neither discriminated between new and existing customers. Whatever rates they offer to new customers, they also make available to existing customers. So, when KBC reduces mortgage rates to attract new business, their existing customers benefit from such a move.
Bank of Ireland and PTSB have separate rates for new and existing customers. If a Bank of Ireland customer wants a competitive rate, they must switch to another bank. But most customers are too busy or too lacking in financial knowledge to undertake the arduous job of switching to another lender.
Another extraordinary feature of the Irish mortgage market is the cash back offered by some lenders to new customers. In most mortgage markets, banks charge their new customers a fee to cover the legal and other costs of setting up a mortgage. In the dysfunctional Irish market, the opposite happens.
Bank of Ireland and PTSB actually pay cash back to new customers. They dazzle them with the short term. But these customers end up paying back a multiple of that cash in terms of higher interest charges over the life of the mortgage.
Neither KBC nor Ulster Bank tempt customers with cash back. But customers like cash back and as a result, KBC and Ulster Bank have found it increasingly difficult to attract new mortgage business.
The ESRI, the Competition and Consumer Protection Commission, academic studies, consumer advocates and representatives of mortgage brokers have all pointed out how damaging cash back is for consumers, yet the Central Bank of Ireland and the Government have not acted to ban it. If these were prohibited, Irish lenders would be forced to compete on interest rates and interest rates alone.
Although KBC and Ulster Bank have the lowest mortgage rates in Ireland, their rates are still far higher than those charged by their parent groups in Belgium and the UK respectively. Despite these high rates they can't generate sufficient profits, because a significant group of customers are unable or unwilling to pay their mortgage and repossessing a home here is a tortuous process.
We all agree that people who face financial difficulty should be given time to recover. And Irish banks have done just that. They have restructured over 100,000 mortgages during the past decade. But there is a rump of people who can't or won't pay their mortgage. The court system makes it very expensive and very time consuming to repossess a family home. No other country in Europe allows such irresponsible behaviour. If someone genuinely can't pay their mortgage, the government helps them with a social welfare payment. If they won't pay their mortgage, they lose their home. But in Ireland, we frown on repossessions so the banks are forced to sell their bad loans to vulture funds at a huge discount.
This adult approach in other countries keeps down mortgage arrears and keeps down interest rates. In Ireland, some people exploit the fact that the banks find it nearly impossible to repossess their home. They don’t care about going into arrears. The lack of repossession is the cause of the very high levels of arrears in Ireland.
With the departure of KBC and Ulster Bank, the two cheapest lenders , there is going to be a catastrophic decline in competition and the remaining banks will be free to hike their rates.
The Government needs to take radical action to make the mortgage market more attractive to foreign lenders. They must ban cash backs immediately and they must reform the legal system so that any lender considering entering the Irish market can be sure that they will be able to get their money back if the borrower refuses to pay.
- Brendan Burgess is the founder of Askaboutmoney.com