Suggestion: Cap existing rates at 125% of the new business rate

S

Sarenco

Registered User
Messages
7,895
Eh, mortgage rates.

Bear in mind that I'm suggesting that mortgage rates should be capped, not that lenders should be prevented from offering lower rates to more creditworthy borrowers.

In France mortgage rates are capped at 133% of the average effective rate on all outstanding mortgages in the previous quarter. In the third quarter of 2014, the average effective rate on all outstanding variable rate mortgages stood at 3.4% and therefore the maximum rate that could be charged by a lender on such mortgages in the fourth quarter of 2014 was 4.53%.

Personally I think it would be preferable if any such cap was calculated by reference to the average new lending rate for variable rate mortgages as reported to the ECB by the Central Bank, simply because this is a transparent figure that is calculated in accordance with detailed rules that are harmonised across the Eurozone.

The purpose of such a cap would be simply to provide a degree of protection to borrowers that are not in a position to refinance their loans. If set at an appropriate level, it should have no impact on competition within the mortgage market.

I have never understood the clamour to give an unelected official the power to set mortgage interest rates - why would anybody think such an official would do a better job at setting appropriate rates than the free market? The Governor also clearly articulated the downside risks of this approach from a competition perspective.
 
So you'd lump all mortgages in together,

Fair enough, but would you include the legacy tracker mortgages in your "average mortgage rate" calculation on which the 33% buffer is based?
You reference France (I have linked said to your post in another thread), where there are 2 different caps (excluding bridging loans) for mortgages - either fixed & variable.
Ireland has uniquely got two very very different "variable products" (the basic SVR and the under priced tracker).

What impact would porting the french model here have? I'd contend it would immediately restrict credit to higher risk consumers through (i) higher deposit requires, and (ii) an inabiltiy for lenders to price sub-prime mortgages correctly = ergo they don't provide them.
 
Yes, I think a single overall interest rate cap for residential mortgages would work.

We already have caps in place in respect of the interest rates that money lenders and credit unions can charge so the principle is already accepted in Irish law. It always struck me as a bit of an anomaly that banks can (in theory) charge whatever interest rate they want.

In terms of the methodology, my preference is that the cap would be set at an agreed % (I have suggested 125%) of the new lending rate returned to the ECB by the Central Bank in respect of variable rate mortgages. This figure is transparent and is calculated in accordance with detailed rules on a harmonised EZ-wide basis. Currently, it would exclude trackers (other than restructured trackers - much to Brendan's annoyance) but I can certainly see tracker-type products re-emerging in the future in the Irish market (probably set at a pre-determined margin over LIBOR or a bank's cost of funds), so this may not always be the case.

Alternatively, we could simply follow the French model. The problem I see with this methodology is that you would have to create a detailed rulebook as to how the average effective rate is calculated and there is no third party available (other than the Central Bank itself) to adjudicate on the proper interpretation of that rulebook. In other words, it all seems a bit of a black box to me. You would also have to set a % rate that reflects the current, large tracker book which may not be appropriate in the future.

I am conscious that I am largely ignoring fixed rate mortgages in this but I don't really see a problem including these in the reference pool of mortgages against which a cap would be calculated.

To be honest, I am not particularly hung up on the methodology or % cap. There doesn't seem to be any enthusiasm for such a consumer protection measure so the precise details as to how it would work is largely academic. Most commentators seem to concentrate on how unfair things are without making any concrete suggestions to change anything in particular.

Oh well, at least I'm amusing myself!:D
 
Last edited:
Sorry I forgot to deal with your last point.

Really the objective of my proposal is simply to provide a degree of protection to borrowers with SVR mortgages that are not in a position to refinance their mortgages, due to a lack of equity, reduced income, etc.

The position in the UK actually looks more extreme to me (although it seems to garner very little media attention or comment). The average SVR in the UK is currently 4.51% but borrowers that are in a position to refinance their mortgages can fix for one year at rates of just over 1%, five year fixes at 2%, etc. If you were to translate that kind of spread in rates to an Irish context, our SVRs would be 6%+. Call me a bleeding heart liberal, but I just don't think that would be good from a societal perspective. Hence my proposal for an overall mortgage rate cap.

While I wasn't particularly focused on the impact of this proposal on the availability of home loans to less creditworthy borrowers, I readily accept that it would inevitably have the impact that you suggest. However, I wouldn't necessarily see that as a negative.

The idea that everybody should buy their own home and should be entitled to access credit for this purpose has caused untold economic misery here over the last decade. In the US, I would argue that sub-prime lending (and the scourge of payday loans) has set back the advancement of certain minorities by a generation (I am conscious that that sounds dramatic but I don't think I am alone in that view).

In any event, if my proposal had the indirect effect of restricting credit to less creditworthy borrowers, well, I would be ok with that.
 
Last edited:
This is an interesting idea. Let's see how it would work in today's market in Ireland.

The average rate for genuine new business according to the Central Bank is 4.2%. So lenders would be able to charge up to 5.6% if we allow a 133% cap.

And that is the problem with the proposal. Where there is a cartel, then such a cap won't help. 133% of a very high rate is just an even higher rate.

The other problem is what would happen where there is excess competition. In 2005, rates were too low. Had we had a responsible lender who opted not to lend because the rates were too low, the rates charged on their back book would have been cut. That is not fair either.

If the average rate is 3% , then the ceiling would be 4%. But what about the sub-prime lenders? If they agree to lend to someone at 6% when the going rate is 3%, I don't think we should tell the lender and the borrower that they can't lend or borrow at 6%.

So it doesn't work where there is no competition and it doesn't work where there is too much competition.

But overall it's an interesting concept, and I would like to tease out these issues with someone with direct knowledge of the French mortgage market.

Brendan
 
Hi Brendan

My suggestion is that variable mortgage rates should be capped at 125% of the new lending rate on house purchases (including renogotiations) in the previous month as calculated by the Central Bank in accordance with harmonised European requirements and returned to the ECB.

This rate stood at 3.36% at end of April 2015 and, therefore, under my proposal mortgage rates would currently be capped at 4.2%.

In France, mortgage rates are capped at 133% of the average effective rate on all outstanding variable rate mortgages in the previous quarter. The average effective rate on all outstanding variable rate mortgages in Q1 2015 was 3.08% and variable rates were therefore capped at 4.09%.

A similar calculation in Ireland would probably produce a lower interest rate cap. I don't know exactly how the French Central Bank calculates the average effective interest rate but, per the Central Bank, the median interest rate on all outstanding mortgages in Ireland is 2.8% - 133% of this figure is 3.724%.

I have given my reasons above why I would prefer to see a mortgage cap based off the new lending rate.

We obviously have laws that prevent collusive behaviour amongst market oarticipants. I'm not sure I understand how you can ever have "too much" competition - surely the key problem that arose in the mortgage lending market between 2002 and 2006 was inappropriate impairment provisioning and a lack of appropriate regulation?

With respect, the idea that you can ever have too much competition sounds like one of Richard Boyd-Barrett's catchy sound bites - sounds great as long as you don't think about it too much!
 
Sarenco said:
With respect, the idea that you can ever have too much competition sounds like one of Richard Boyd-Barrett's catchy sound bites - sounds great as long as you don't think about it too much!
Click to expand...

There is no respect in this at all. It's extremely insulting. I don't do sound bites.

I suggest you argue the point, rather than insult me.

You should think about it a little bit.

I said it at the time that it was crazy that the mortgage rate was very close to the deposit rate. This was caused by lenders looking for market share. Handing out trackers at ECB + 0.5% was crazy - it was as a result of too much competition.

Brendan
 
The cap is an interesting idea but there is little flexibility and its up to central bank to ensure rates are fair.Brendan is absolutely right about charging too low prices, you'll recall bank of Scotland came into the market and they blew it up with cheap trackers. Low interest rates may be good in the short term but it came with a price the last time, just one of the reasons for our current predicament
 
When the mortgage rates are dictated by a cartel, a cap will only serve to bolster the cartels' dominance.
 
While I'm obviously pleased that an interest rate cap is being proposed as a mechanism for providing a degree of protection for borrowers that are not in a position to switch mortgage providers, I would have a number of problems with FF's proposal:-
  • There is actually no proposed fixed % cap - the provision simply enables the Central Bank to set a cap if it determines that a market failure exists. Given its recent public attitude, I think we could be reasonably confident that the Central Bank would not exercise this power (or any of the other proposed powers to intervene in the market) in the current circumstances;
  • As defined in the draft Bill, variable rate mortgages exclude trackers. This obviously makes a dramatic difference to the calculation as to what constitutes the "average" variable rate;
  • Mortgages on non-PPRs are excluded. i think this is a mistake, partly because there are a significant number of "accidental landlords" that have rented out properties that are no longer suitable for their needs whilst renting elsewhere - are these borrowers not entitled to protection? Also, higher financing costs inevitably feed into higher rents and all that that entails; and
  • There is no detail as to how the "average" variable rate is to be calculated or by whom. Is this the median rate charged on all outstanding variable rate mortgages (excluding trackers) in the previous quarter or is it something else?
 
tonymac said:
If im right you made a suggestion in a different thread about allowing a max rate of 133% of the average tracker rate like in France.
Click to expand...

Not quite.

The French model imposes a statutory cap equivalent to 133% of the average rate charged on all outstanding variable rate mortgages (including, but not limited to, trackers) in the previous quarter.

So, if the average variable rate (including trackers) is 3%, the maximum variable rate that could be charged by any lender would be 3.99%.

I'm not aware of any politician that has advocated adopting the French approach here, which I think is a pity.
 
That's fair enough Sarenco on the fact that it'd be on 133% of all mortgage types. I think it's a good idea you've put forward but the problem is that the rates charged here are all extortionate. For me the banks do operate a cartel here as the rates are all bad and out of kilter with the ecb rate. If you're proposal could somehow operate and break up that cartel great, 3.99% would be a vast improvement for some on rates like 4.5% if of course 3.99% turned out to be 133% of the average rate. It is a shame no politicians have put it forward, maybe it could be calculated at a few rates like say 120% also to see what figures would come out as an exercise.
 
The problem with giving the Central Bank (or any other institution or official) a power to fix or control mortgage rates is that it might not exercise this power in the way you want or at all.

The Central Bank has been pretty clear that it doesn't want the power to control mortgage rates and wouldn't exercise any such power in the current environment.

What's the point in giving somebody a power they don't want and won't exercise?
 
The CB is a state institution and if the state decides it should be fulfilling it's consumer protection mandate then it should do so. This is the problem here, we've been left high and dry and the CB has left the banks do what they want. The state doesn't want to do this because it suits them to have things as they are, eg the svr holders getting gouged to bail out the banks again and carrying the can for everyone instead of the state doing so.
 
I certainly take the point that letting off steam has certain therapeutic effects (and I hope you don't think I was trying to have a dig at you or anybody else in making this comment).

I'm afraid I can't offer any real advice on how to orchestrate a campaign other than to suggest that you keep at it and to keep your proposal specific and readily actionable.
 
I agree with keeping proposals specific and readily actionable.
A more favourable cap is deserved, suggest a cap on variable rates of 110% and 115 % for fixed rates.
 
110% of what exactly? The average new variable lending rate as reported by the Central Bank to the ECB?

I'm certainly not hung up on the precise % or methodology but you do need need to leave adequate room for competition in terms of new lending or the measure becomes self-defeating. There is no point designing a cap that is based off a new lending rate that itself becomes uncompetitive.
 
Last edited:
You must log in or register to reply here.
Back
Top