The Central Bank says the average SVR is 4.51%

Brendan Burgess

Founder
Messages
51,906
The Governor has given the Oireachtas Finance Committee new figures on the true mortgage rate for new business.

It's 4.51% not the 3.47% their statistical series say

[broken link removed]



The reduction of two further steps in the ECB’s main policy interest rate has had a complicated influence on financing conditions in Ireland.


...

On balance the positives for Ireland clearly outweigh the negatives, not least to the extent that the ECB’s expansionary policy will help boost economic demand in the euro area as a whole in the course of bringing inflation back to its target.
...
Irish borrowers on tracker mortgages have seen this further interest rate reduction fully passed on to them, continuing and reinforcing an exceptionally lengthy period of ultra-low interest rates that has helped those borrowers.
...
Because of the impact on trackers, though, the lower ECB interest rates have not directly improved the banks’ profitability, because the average and marginal cost of bank funds does not fall as much. The banks’ drive to restore their profitability, combined with the lack of sufficient new competition, has meant that, far from lowering their standard variable rates over the past three years as ECB rates have fallen, they have (as is well known) actually increased the standard variable rates somewhat. The trends are shown in the attached figure which is based on a simple bank-by-bank average of the advertised standard variable rates for an 80 per cent loan-to-value mortgage. (Since this trend is not evident from the traditional interest rate series published by the Central Bank in line with international standards, we have been working on the assembly on a rigorous basis of additional statistical series on mortgage interest rates, and expect to publish these as from data for January 2015.) These rates indicate that standard variable rate borrowers are still paying less than they were before the crisis, but not by much. A widening of mortgage interest rate spreads over policy rates also occurred in the UK and in many euro area countries after the crisis, but spreads have begun to narrow in the UK and elsewhere. Until very recently bank competition has been too weak in Ireland to result in any substantial inroads on rates.

...
What is the role of the Central Bank in the area of mortgage interest rates? From the prudential point of view, we could have a role in seeking to ensure that banks set rates on new business sufficiently high to cover the risks of future default. While the current spreads would not have been sufficient to compensate the banks for the risks they actually took in the boom, much of which still embedded in the existing stock of mortgages, I think it would be hard to argue that mortgage underwriting today was so bad as to require such a high margin on new business. Inevitably, though, constrained by their inability to restore spreads on trackers, the banks have sought all means to restore their profitability including the widening of standard variable rate spreads, which typically apply to old as well as new business.
...
As in most advanced economies, in Ireland it has long been understood that tight administrative control over the rates charged by banks would be counterproductive in ensuring a sufficient flow of properly priced credit on a lasting basis. For one thing, such control would strongly discourage new entrants. Therefore, while interest rate spreads are now high, since national credit policy is crafted with the welfare of the people as a whole being the “constant and predominant aim”, I see no sufficient basis for altering this view.
 
Last edited:
The Governor has given the Oireachtas Finance Committee new figures on the true mortgage rate for new business.

It's 4.51% not the 3.47% their statistical series say

I haven't got the documents yet.
.....................
Maddening;
These are the boyos consumers have to rely on?

In the name Central Bank ,we see they are bank orientated .
They are not called Central consumer Bank!
 
Great questioning from Michael McGrath and Kieran O'Donnell

Michael McGrath
I get theimpression that rates are high, but you don’t want to exert control. Are they high?


Honohan: They are a bit on the high side
Should the Oireachtas consider giving us the power to control rates?

I think not - If there is tight control over interest rates – is not good for confidence in the banking sector



One exception – Mortgages which are sold to non banks. They are harvesting without getting involved in new business. They might be prevented from deviating from market conditions as they won’t have the natural restraint of new business.



McGrath: 300,000 are paying a rate which you consider high. The banks are taking advantage, exploiting. Have you discussed the rates with the lenders?





Honohan: They read my public comments



You might say that SVR are paying more. But the tracker are paying a lot less. The taxpayer is paying a lot more. The banks shareholders are not big winners.



McGrath: Why are they so high compared to the Eurozone?
Cost of funds are higher –


McGrath: but not by 2%
 
Kierán O’Donnell


Honohan: We have published these figures in this format for 15 years. Statisticians are conservative. It’s not telling us what we want to know.
In the annexe, You have the actual numbers – 4.51%


O'Donnell:Why is it 2% higher



Honohan: RBS said that they were staying here because it’s profitable



O’Donnell: How do we get competition. You are the regulator. You said previously “Competition is not about the number it’s the environment” . What can you do as Reg so that the existing banks will start to compete and to encourage new entrants

Honohan: The reason we have exits and no new entrants - . We start to hear noises about people entering. If anyone is interested in coming into the market, we tell them we are ready. We have no barriers.


O'Donnell: Do you have any current license applications
Honohan: No I don’t think so.

O’Donnell: The trackers are proving difficult for the banks. Is it now incumbent on the ECB to lift the trackers off the balance sheets of the banks. It would free the lenders from charging the exorbitant SVRs.
You agree that they are penalizing the SVRs because of the irresponsibility on the trackers


Honohan: The ECB is now buying bundles of mortgages. The problem is that they buy them at the market price. The value of trackers is not that high, because of the low yield. So it’s not attractive for the banks to sell.



We, Finance and CB and eCB tried to come up with a device for the trackers. The best plans would involve the not just the ECB but all the national parliaments.
O’Donnell: Could you come up with some sort of blended product? It’s a major impediment to the proper functioning which compete in terms of the SVR. There is an onus on the ECB to assist us and find a solution which can work. Is there ongoing discussions?

Honohan: It’s paused. We worked as hard as we could. The ECB is constrained. It can’t do giveaways.
It’s a good idea, but I don’t think it’s a runner.
 
Pearse Doherty


You say rates are too high, but you are not going to do anything about it.



Honohan


1) We don’t have the power to control rates
2) We should not have the power


We might have to do something, if the rates were egregious, but they are not egregious.
 
Deputy Tom Barry (FG Cork):


I hear people complaining about high standard variable rates. If you can’t afford to pay 4% on a mortgage, you shouldn’t be getting a mortgage
 
Boyd Barrett
I am worried about the problems happening again. Do you have responsibility to express concerns to the Government




Honohan: Yes


(Boyd Barrett made great points about affordability - I will write them later)
 
Deputy Tom Barry (FG Cork):


I hear people complaining about high standard variable rates. If you can’t afford to pay 4% on a mortgage, you shouldn’t be getting a mortgage

Are you posting this as an example of a wealthy out of touch politician who doesn't have a clue about the reality of ordinary peoples lives

or

as an example of sterling common sense. I am genuinely unsure how you see this quote.

To my mind the latter is closer to the mark. The recent crises was in large part caused by lending to people who couldn't afford it, and I can see a move toward repeating this beginning again.
 
Hi Delboy

It was Tom Barry who said it.

When I heard it, my initial reaction was "an example of a wealthy out of touch politician who doesn't have a clue about the reality of ordinary peoples lives"

But, of course, his conclusion is correct - mortgages should be stress tested at 4%, probably at 5%.

But he appeared to be dismissing the valid complaints of people who are currently paying 4.5% who should be paying around 2.5%. They can afford to pay 4.5%, but they should not be paying it.

Brendan
 
Transcript from Hononhan's committee appearance

http://oireachtasdebates.oireachtas.ie/Debates Authoring/DebatesWebPack.nsf/committeetakes/FIJ2014112600005?opendocument

Deputy Kieran O'Donnell: I welcome Professor Honohan. The rate that the Central Bank has quoted as being the average rate is 3.47%. However, the standard variable rate available for new business is approximately 4.3%. We are hearing reports that restructured tracker mortgages are included in the Central Bank's figures. Is that correct?

Professor Patrick Honohan: That is absolutely correct. There is a standard series which has been published for many years - at least 15 - which follows a particular international statistical template. Statisticians are very conservative people. They do not like to change their definitions. We have known for months if not years that this is telling us a certain part of the story and while it is not irrelevant, it is not telling us what most people want to know, namely, what would be the standard variable rate available now if one walked into a bank. I have said this repeatedly and drawn attention to the standard variable rate. The Deputy quotes the figure of 3.47% which is in our publication as the average rate, which includes restructures. In the annexe to the publication, we made sure to include the actual number for new customers, which is 4.51% and not 3.47%. However, 3.47% is not an irrelevant number but is just a number ---

Deputy Kieran O'Donnell: Can I take it from what Professor Honohan has just said that in any future publications from the Central Bank, two figures will be given? The first will be based on what the bank regards as the standard norm ---

Chairman: Deputy, I must ask you to put your phone away. It is causing problems with the sound system.

Deputy Kieran O'Donnell: The Central Bank will, henceforth, publish a report which will give two elements. The first will be the standard measure, which is an international measure as well the other figure, in this case, 4.51%. In an Irish context, 4.51% is the more appropriate rate to quote.

Professor Patrick Honohan: For new business, yes, in the context of the standard variable rate.

Deputy Kieran O'Donnell: That is about 2% above the norm in Europe. Why is that the case?

Professor Patrick Honohan: There are two reasons for that. The first is that the cost of funds is higher and the second is a lack of competition. There is insufficient competition in the market and we are already seeing the effects of that. AIB recently got a reduction and I hope that is the beginning of a trend. My perception is that the decision of RBS to stay in Ireland reflects the fact that it sees a market here that is not being constrained by rates being held down. It sees that there are good profits to be made. That will result in a convergence towards a better rate.

Deputy Kieran O'Donnell: How do we get competition into the market? We had the principal banks in before this committee last week.

Professor Patrick Honohan: They do not want competition, I presume.

Deputy Kieran O'Donnell: It is clear, from the way they are pricing, that we almost have a cartel in the first-time buyer market in banking. We do not appear to have effective competition. The Central Bank's role is to regulate banking. Professor Honohan said in a previous presentation that competition is not just about the number of banks in the market but also about the environment. How can we get to a point where we can bring competition into the market? First-time buyers as a group are having difficulties. A report released today by the NESC suggest that many people will be unable to own their own home, something to which many Irish people aspire. What can the Central Bank do, as the regulator, to create an environment in which the existing banks will start to compete with one another, which they are not doing at present, and new entrants will be encouraged to come into the market.

Professor Patrick Honohan: There have been no new entrants and a number of exits up to now because of the crisis, the lack of confidence, the backlog of unpaid mortgages and so forth. We are working through all of that and rebuilding confidence. That is what has ensured that Ulster Bank stayed here. We are now starting to hear noises that people are interested in entering the mortgage market. The Central Bank is not turning anybody away. The power to license banks is still retained by the Central Bank. We are certainly not discouraging anyone. On the contrary, whenever people look like they are interested in setting up here, we are telling them that we are open for business and that new entrants would be welcome. Tools for encouraging competition are not readily available but we are not creating barriers.

Deputy Kieran O'Donnell: Are there any current applications for a banking licence?

Professor Patrick Honohan: I do not think so.
 
Last edited by a moderator:
Hi Jackal

That's great.

The thing which I find odd is that both Governor Honohan and Michael Noonan want competition. They say that UB is good for competition. No it's not. Their rates are higher than the others.
 
Brendan,

I for one would like to thank you for getting this one on the agenda and for getting honohan to agree (albeit indirectly) that their quoted rate of 3.47% was garbage.

Irish Times article today:

Only ECB can help cut mortgage rate, but don’t bank on it

It looks like the Oireachtas finance committee is powerless to enact change but who knows what is going on behind the scenes.

kmick
 
Hi all
Some of the commentary from the Professor above does not make sense, he says

"My perception is that the decision of RBS to stay in Ireland reflects the fact that it sees a market here that is not being constrained by rates being held down. It sees that there are good profits to be made. That will result in a convergence towards a better rate."

How does this make any sense, on one hand RBS sees Ireland as an opportunity to make profits but this will also lead towards a better rate. I believe it is worth reminding Minister Noonan of the definition of a Cartel which is and I quote
CARTEL; An association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition: I believe this is a lot more accurate a reflection of what is going on. What is really sickening is that most people reading this site own a lot of this Cartel but all we can do is keep the pressure up. One way of creating a reaction for certain is for people to stop entirely borrowing for houses and stop purchasing for a period of at least 1 year. This is how we as a group can create what would be know as competition within the existing market place. Feeding this Cartel is similar to others (drugs) where the frenzy to purchase is self creating the high interest rates. However getting this through could prove impossible. Still trying to encourage Santander and HSBC to come to the market is good but if they do at present it will be because of the higher profits they could make and not for the reasons we all want to see. Just my thoughts
Padraic
 
Hi kmick

Thanks for linking to that article by Ciarán Hancock

The appearance last week of [broken link removed] of Ireland governor [broken link removed] before the Oireachtas finance committee was both revealing and somewhat depressing in relation to mortgage interest rates.The governor told the committee that the average rate being charged by Irish banks is 4.51 per cent rather than the 3.47 per cent that has been stated previously in official figures. The latter number included restructured mortgages.

...
Irish MEP [broken link removed] said the governor’s figures exposed the “rip-off” that Irish mortgage holders have to deal with.



“If I walk into a bank in Germany or France, I can get a 20-year fixed rate mortgage at less than 3.5 per cent interest. Our mortgage system needs a major overhaul,” he said.



Last month Hayes told the national conference of the Banking & Payments Federation that the variable interest rates being charged in Ireland were a “disgrace”. Hayes has made mortgage rates a key policy issue since his election in May and plans to lobby the ECB on the matter.

It's interesting that there are so few TDs concerned about this. I think people with non-tracker mortgages should be phoning their TDs - especially the Fine Gael TDs.

Michael Noonan could well pressurise all the banks to cut rates.
 
Back
Top