Why latest rate cuts from AIB and KBC don’t go far enough

Move will benefit 50% fewer AIB customers than last rate cut and the banks’ customers are still paying considerably more than European norms

AIB’s rate cut will please its customers, but has the bank gone far enough? (Photograph: Cyril Byrne/The Irish Times)

AIB’s rate cut will please its customers, but has the bank gone far enough? (Photograph: Cyril Byrne/The Irish Times)

 

AIB customers got some welcome news when the bank said it would make a quarter percenage point cent cut to its standard variable mortgage (SVR) rate. At 3.4 per cent, the new rate is now one of the most competitive in the market, just behind of the 3.3 per cent offered by KBC Bank, and it is expected that some 76,000 AIB mortgage customers will benefit from the move.

KBC followed suit within hours, lowering its standard variable rate for new customers to 3.2 per cent.

But is this enough?

Firstly, despite this latest cut, Irish mortgage rates remain extremely expensive in a European context. As of December 2015 for example, the typical new business rate on an Irish variable rate mortgage was 3.76 per cent, according to Central Bank figures, compared with a euro zone average of just 1.99 per cent.

The rate cuts by AIB and KBC mean they may now be the most competitive on the Irish market, but both are still charging considerably more than the euro zone norm, and far above the average rate charged in Germany (2.62 per cent); Spain (1.68 per cent) and France (1.98 per cent) in March of this year.

It is an anomaly that persists despite political pressure. Fianna Fáil finance spokesman Michael McGrath is hoping to exert even more pressure on this front. He said on Monday that he hopes to publish a Bill within two weeks which will propose giving the Central Bank extra powers to help it to coerce banks to cut rates.



The move to fixed rates

Furthermore, the number of people who will benefit from the cut is much less than in previous rate cuts. Last August for example, AIB said that its SVR cut would benefit some 156,000 mortgage account holders.

Monday’s announcement, however, only applies to AIB, and not to its Haven and EBS subsidiaries. That means it will help just 76,000 customers cut the cost of their mortgage, or some 50 per cent fewer than in previous rate cuts.

The exclusion of Haven and EBS in the announcement will clearly be unwelcome to variable rate customers with those lenders. Another factor limiting the numbers benefitting may be the very concerted effort by banks to switch customers onto fixed rates, by offering their best rates on these products.

Ulster Bank for example, recently came together with One Big Switch to offer its lowest rate of 3.29 per cent – over a four-year fixed term – while earlier this year Bank of Ireland announced cuts of up to 0.35 per cent, but just to new fixed mortgage interest rates.

Bank of Ireland, which continues to have a stubbornly high top rate SVR of 4.5 per cent, has perhaps achieved the strongest shift to fixed rates. In the second half of 2015, for example, fixed rate products accounted for two-thirds of all its mortgage lending, up significantly from about 30 per cent just a year ago.

This has also had a significant impact on its entire mortgage book, with 16 per cent of its mortgage book on fixed rates as of end 2016, up from 9 per cent in 2014.

AIB itself has seen more of its mortgage book switch to fixed rates – from 8 per cent in 2014 to 11 per cent at end 2015 – although it should be noted that its latest rate cut means that its SVR is now the lowest rate it offers.

Having more customers on fixed rates may offer a bank more stability but it also makes it more difficult for customers to switch, with banks typically imposing expensive break fees for customers looking to move off a fixed rate.

This makes switching offers, such as AIB’s €2,000 contribution towards legal fees, or Bank of Ireland’s 2 per cent cash back, sound attractive but limits take-up, with factors such as the number of mortgage customers still on trackers, or those unwilling to go through the whole mortgage process again, precluding many from switching to save.

Figures from the Banking & Payments Federation for example, show that just 130 property owners a month switched their mortgage in the first quarter of this year. And this represented a dramatic increase on the same period in 2015 when just 56 customers a month switched.