What is a fair residential mortgage interest rate ?

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gnf_ireland

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I have been wondering what people consider a fair mortgage interest rate to be for private residences (where the cost of borrowing is effectively 0%)

I have attached what I would consider a fair sliding scale to be in my personal view. I don't know how to make it a table on the post itself.

I will admit I am financially conservative in this area (lending) and I personally place more merit on Income Ratios than LTV ratios. I also believe Income should be calculated as the average of the last 3 years P60 returns. Nothing more and nothing less.

Any thoughts on whether you would consider this to be a fair interest rate or not ! Comments on a postcard please.
 

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The blended cost of funds for banks is more like 1%, not 0%.

With the current repossession regime, I suggest 3% is a fair rate, giving a 2% NIM.

With a different, faster repossession regime, 2.0-2.5%?
 
linking a rate to LTI from the outset on new lends might make sense but in existing instances where a borrower has taken a loan in say 2006 with a reasonable LTI (and LTV) at the time but is now in a position where either income is down considerably, one job could've been lost, or high childcare costs etc and saying to that person that their rate will be higher because there's more risk of them defaulting creates a bit of a self fulfilling prophecy - "there's a good chance you can't afford to pay your mortgage so we're going to make your payments even less affordable to reflect this risk"
 
@Mackemdub is it not a bit like most things. You sign up based on your LTV and LTI ratios at a point in time and you stay on that rate unless you elect to move off it. The banks have made their assessment based on various factors at the time to offer you those rates over the period of the mortgage.

However, if you elect to switch or re-mortgage with the same bank (similar to doing a new valuation form today), you would also be required to submit the last 3 years P60's to move bracket. If your circumstances have gotten worse, you simply stay on your current band
 
@Protocol do you mean 3% for all LTV/LTI or 3% as the standard SVR for those who qualify as 'prime' lending (so 80% LTV and LTI ratio of 3.5 - central bank rules)?

And I agree completely with repossession issue, but I believe the banks should clearly spell out the cost of this current policy all parties so the politicians can see the impact this is having on other people. Kicking the can down on the arrears issue for 7 years has not worked !
 
gnf_ireland said:
@Mackemdub is it not a bit like most things. You sign up based on your LTV and LTI ratios at a point in time and you stay on that rate unless you elect to move off it. The banks have made their assessment based on various factors at the time to offer you those rates over the period of the mortgage.

However, if you elect to switch or re-mortgage with the same bank (similar to doing a new valuation form today), you would also be required to submit the last 3 years P60's to move bracket. If your circumstances have gotten worse, you simply stay on your current band
Click to expand...

yes, that would be fair enough. it's all in the context of new lending, i though you might be suggesting that existing agremeents might be amended.
 
I would have thought that a "fair" rate from a borrower's perspective would be the best market rate available, having regard for the borrower's personal circumstances.

I do believe that some form of legal protection is warranted for borrowers that are not in a position to refinance their borrowings (whether due to negative equity or reduced income). My suggestion is that rates should be capped at 125% of the average new business rate as returned to the ECB by the Central Bank. At the moment, this would be 4.5% (125% of 3.6%).

France caps interest rates at 133% of the average interest rate in the previous quarter and the interest rate cap for variable rate mortgages at the end of 2014 was 4.53% (the average effective rate was 3.4%).
 
@Sarenco My issue with this is where can I go today to get a rate of 3.6% ? This is the average rate for new business according to the central bank, but there is no bank offering this today. KBC has the lowest variable rate @ 3.61 APR on a LTV of <60%

Also there is nothing in this process to stop all banks raising their rates to 10% and the cap becoming 12.5% for example?
 
Sarenco said:
the average new business rate as returned to the ECB by the Central Bank. At the moment, this would be 4.5% (125% of 3.6%).
Click to expand...
Confusingly the CB report TWO different average new business rates - right now 3.6% or 4.26% whichever you're having...

http://www.askaboutmoney.com/thread...ortgage-rates-in-ireland.194014/#post-1431833
France caps interest rates at 133% of the average interest rate in the previous quarter and the interest rate cap for variable rate mortgages at the end of 2014 was 4.53% (the average effective rate was 3.4%).
Click to expand...
Just curious ... do you have a link to more info about that?
 
@Mackemdub I dont believe its reasonable to amend existing agreements - no different than I believe you should be amending existing trackers. But more people may switch if the new mortgages including this facility which may force the banks to be more reasonable with the existing customer base

I have just moved to KBC from BOI. I would happily move to Ulster or AIB if they were to offer me a lower rate and the facility to offset savings against mortgage interest
 
@Clonback but averages are just that - averages! Should someone with a LTV of 30% and an LTI of 2 times be given the same rate as someone with a LTV of 80% and a LTI of 4 times for example ? Surely not - the risk profile between the two scenarios are completely different

Why stop at average - why not target the lowest rate ?
 
Sarenco said:
My suggestion is that rates should be capped at 125% of the average new business rate as returned to the ECB by the Central Bank. At the moment, this would be 4.5% (125% of 3.6%).
Click to expand...

How about a modification to this and have the cap based on the MEDIAN value of all countries in the Eurozone - who have 'effectively' the same cost of lending? Surely this would be a greater spread and benchmark how competitive our banks are against other countries.
 
ClubMan said:
Confusingly the CB report TWO different average new business rates - right now 3.6% or 4.26% whichever you're having...

http://www.askaboutmoney.com/thread...ortgage-rates-in-ireland.194014/#post-1431833

Just curious ... do you have a link to more info about that?
Click to expand...

Well the CBI only returns one new business rate to the ECB, which is calculated on a harmonised EZ-wide basis. Another alternative would be to copy the French approach of working off an average effective rate (which, of course, would capture all trackers) but I think the reported new business rate at least has the virtue of being transparent.

I am attaching a link to a short presentation on interest rate caps in France.
 
gnf_ireland said:
How about a modification to this and have the cap based on the MEDIAN value of all countries in the Eurozone - who have 'effectively' the same cost of lending? Surely this would be a greater spread and benchmark how competitive our banks are against other countries.
Click to expand...

The difficulty is that there are significant differences between the risk-adjusted return on capital of banks across the EZ. In simple terms, lending in Ireland is very risky and therefore expensive because more capital has to be set aside as a provision for defaulting loans. Only Greece has a higher default rate than Ireland on home loans within the EZ and we are out on our own in terms of our failure to address these defaults.
 
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I consider a fair rate is that margin above ECB for an SVR when I took out the mortgage in 2003 and 2007. I do not consider the rates are fair currently and need to move appropriately and sufficiently to drop to that margin.
 
gnf_ireland said:
@Sarenco My issue with this is where can I go today to get a rate of 3.6% ? This is the average rate for new business according to the central bank, but there is no bank offering this today. KBC has the lowest variable rate @ 3.61 APR on a LTV of <60%

Also there is nothing in this process to stop all banks raising their rates to 10% and the cap becoming 12.5% for example?
Click to expand...

To be fair I believe the French legislation does allow the Governor of their Central Bank to step in where there is evidence of this type of collusive behaviour. In theory this should not happen in a competitive market because a new entrant would be highly motivated to offer lower (but still highly profitable) lending rates. However, I take the point that credit markets can be dysfunctional for extended periods (I would argue that the current market in Ireland is dysfunctional, largely because of government interference) and vesting some sort of rate setting authority in the Central Bank might be appropriate if it could only be exercised in tightly defined circumstances.
 
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