Crucial times for the future of lending

These are crucial times for the future of Irish mortgage lending. Today may see the first rate rise in quite some time from the European Central Bank but it is also a time when the lenders are under pressure like no time in the past. Normally, a rate rise would guarantee a speedy response from Irish lenders - but this time it may not.

Once again, the main reason for this good news for Irish borrowers is the Bank of Scotland. Just last week it again cut its interest rates. They are now significantly below the rates set by the Irish lenders and it is possible the war in the mortgage market may heat up again, despite the Irish lenders attempts to play it down.

The cheapest variable loan on the market is now 3.69 per cent from Bank of Scotland, followed by 3.8 and 3.85 per cent from Superquinn's Tusa and the EBS respectively.

So far, the Irish lenders are refusing to react to the Scot's latest cut. In a similar response to its entry to the Irish market in August, most of the domestic players are at pains to indicate that they will not respond to the rate cut.

Privately, some said that the latest rate cut from Bank of Scotland is proof that it has not managed to attract significant amounts of business. While the Bank Of Scotland has not revealed exactly how many customers it has lent money to, it said 6,000 people had requested information and applications packs to be sent to them. A spokesman said that while Scotland was a different market to the Republic, the ratio of loans to packs sent out when direct mortgages began there was around 40 per cent.

So far, it has only made its approval figures public but at £250 million these are very high and amount to about 1 per cent of the total mortgage market. The question is, of course, how much of this it then went on to lend.

Many customers seek loan approval from several lenders, while others are at the end of the day unwilling to pay the money to move mortgage. At up to £1,000 in legal and other fees these costs can be substantial.

However, Bank of Scotland is offering £500 to offset these costs and that could prove very attractive to many homeowners.

Bank of Scotland also insists that it is pleased with its performance so far and that it is on target to do between £150 million and £200 million of business in its first year. And it points out that it has been attracting very high quality loans which all the lenders want - large loans with less than 80 per cent of the value of the home lent.

The other problem for the Irish lenders is that Bank of Scotland has also promised it will always maintain its variable rate within 1.5 percentage points of the European Central Bank's base rate. Currently, the ECB rate - at which the financial institutions buy money - is 2.5 per cent.

In Britain, Bank of Scotland offers direct banking mortgages at a variable rate of 6.15 per cent, just 0.9 percentage points higher than the Bank of England rate of 5.25 per cent. So, the possibility of even lower margins is there.

But probably the key will be today's meting of the European Central Bank. If it does not announce a rate rise, the Irish lenders will be under pressure to match Bank of Scotland's 3.69 per cent. According to Jim Power, chief economist at Bank of Ireland, a quarter point rise from the ECB to 2.75 per cent is most likely. If that were to happen, he says the Irish banks would probably leave rates where they are rather than trying to match the hike.

Bank of Scotland would still be the cheapest lender but not by a very significant amount. However, it is even questionable whether that is sustainable in the long run. The main banks's key concern is to try and nudge the Scots out of the market before they extend their offering to the still very lucrative areas of credit cards and personal loans.

A larger rate rise from the ECB of half a percentage point would probably have to be matched in some way by the Irish lenders, according to Mr Power. It would also be very difficult for the Scots to maintain rates at 3.69 per cent if the base rate were 3 per cent and all would probably push rates up by about a quarter of a point.

Whatever the outcome, all Irish borrowers have the Scots to thank when looking at current very low variable rates.