Irish Permanent mortgage rate cut will start price war

The surprise mortgage rate cut from Irish Permanent is likely to be the opening salvo of a price war among mortgage lenders.

Ever since the introduction of the euro, Irish lenders have been seriously out of line when compared with their European counterparts, taking far larger profit margins than their peers in France, Spain or Germany.

It was only a matter of time before they had to bow to the inevitable pressure and begin to bring rates into line with EU norms.

The arrival of the Bank of Scotland has precipitated this process. Irish Permanent says it has been planning to cut rates for some months now but needed the merger to be out of the way before embarking on this course. It also points out that, at £11 million, it is a far easier pill to swallow with Irish Life's coffers in the background.

But the speed of its response is probably testament to the surprise volume of calls to Bank of Scotland, which had 1,500 queries in just five days.

Some of the lenders had said that they were hoping they would not have to respond to Bank of Scotland. Privately, they pointed out that the new entrant was cherry picking - only offering loans to those with 20 per cent deposits and secure earnings. With more and more fixed rate loans being demanded, they hoped they could ride out the storm. Yesterday, they were surprised by the scale and speed of Irish Permanent's move.

Whatever the arguments about the timing - and the extent of the reduction - it is now clear that all the other lenders will have to follow. The banks have already been looking at changing the way they decide on various lending rates.

Irish Permanent has now moved in this direction. According to chief executive, Mr Billy Kane there is no longer any relationship between mortgages and savings and in future there will be no cross subsidisation. The advent of the euro of course makes this far easier for the lenders, which now have access to very large and liquid money and interest rate markets in the euro zone to raise funds.

It is not yet clear quite how low rates will drop. A number of the other main lenders are known to be closely examining their interest rate structure and some fairly dramatic moves could be on the way. What does seem certain is that EBS will ensure it remains the cheapest domestic lender, although it is very unlikely to beat Bank of Scotland's 3.99 per cent. It may also be under less pressure to do so given its lack of exposure to the mortgage broker market.

It is possible that this round of rate reductions will not be the last. Mr Kane said yesterday that the bank was heading towards the EU norm of 4.5 per cent. He did point out that distribution costs are higher here than Germany because of the small population but he was in no way ruling out further cuts.

"We are a large company and we have a large market share and we will do whatever we have to protect it."

The domestic lenders had also been taking some comfort from the fact that Bank of Scotland was only offering a variable rate. Over recent weeks, the market for fixed rates has picked up considerably as borrowers realise that fixed rates are on the way back up.

The new level of competition could also mean other significant changes for the Irish mortgage market over the coming years. One possibility is that first-time buyers borrowing a large portion of the property value may have to pay a higher rate of interest than those borrowing a smaller proportion, even if their loan is bigger. But whatever about the detail, it is clear that Irish homeowners have a lot to thank the euro for.