Is it time for a new SVR model?

[gnf_ireland]

Over the last few weeks, I have been thinking about ways to change the SVR model to make it fairer on the customer. I believe the current SVR model which allows banks to change their rates, at will based on no agreed metric, is very unfair. It basically means there is no incentive for a bank to improve itself, as there is always a 'default' cash cow available for 'plundering' as necessary

This got me thinking about what would be a fair approach for both banks and customers, which would not only allow customers easily compare SVR mortgage options but also allow banks to modify the SVR rate based on reasonable and agreed changes in market conditions. While not completely comparable, I did think about the Commission of Energy Regulation - which effectively fixes (guides) the default price of electricity and gas, and then allows the various companies offer 'discounts' on these rates as they see fit to ensure competition. Would the same model work for SVR?

The price of electricity and gas are driven by both external and internal factors - including the wholesale cost of gas/oil, which are completely outside the companies control. They also have costs which are completely inside the companies control, e.g. wages etc. The same applies to the cost of lending by banks.

My suggestion is the Central Bank (or whomever) and the banks agree a single baseline SVR rate taking into account the various internal and external factors which influence the SVR. Each factor is given a weighting which allows a single SVR rate to be 'baselined' across all banks operating in Ireland. Each external factor (market) is recalibrated on a quarterly basis, and the internal factors (bank controlled) are recalibrated on an annual basis. The Q1 SVR review on 31st March would come into effect 3 months later, i.e. on 30th June.

The banks would be allowed to offer permanent surcharges/discounts on the baseline SVR based on an agreed set of criteria, as well as special 'introduction' discounts which would be limited to 1 year. However, the agreed criteria would need to be explicitly called out in the mortgage approval document, and any permanent discounts would automatically apply to both new and existing customers who qualify for them, based on the mortgage approval document.

Surcharge examples could be 'exemption availed of on the Central Bank rules', BTL properties, sub-prime lending scenarios or 'company weighting due to higher cost base' etc
Discount examples could be lower LTV or LTI ratios, 'company weighting due to lower cost base', holding a current account with the bank or 'paying an arrangement fee upfront'

This would mean if Bank A offered (SVR -0.75%) and Bank B offered (SVR -0.7% - 1 year introduction of 0.25%), the customer clearly knows that from year 2, Bank B will cost then 0.05% extra for the remaining life of the mortgage. It allows customers to do comparisons of banks fairly, and not just on what the best situation is today but also in 5 years and 10 years time. This is the part that is clearly lacking today

This model would also allow the banks to clearly determine the factors which influence the SVR rate, and since all banks are working off the same SVR rate, they have a clear incentive to be as competitive as possible, and maximise their profits based on being efficient.

Any thoughts on the above proposal, and while I am sure it is not without fault, does it make any level of sense? While I know it does sound very much like a tracker mortgage, it is not really the same due to the consideration for all elements which determine the baseline SVR rate

 

[cremeegg]

The whole point of capitalism is that when businesses and individuals make their own decisions, they do a better job than if decisions are made for them by a committee.

To take a particular point from your post

"My suggestion is the Central Bank (or whomever) and the banks agree a single baseline SVR rate taking into account the various internal and external factors which influence the SVR."

These factors would change over time. Not the value of the factors but the actual factors. Who would have the authority or incentive to respond to these changes.

However the state certainly has a role in ensuring equitable market conditions.

I believe that banks should not be allowed to charge different rates to new and existing customers.

 

[gnf_ireland]

The whole point of capitalism is that when businesses and individuals make their own decisions, they do a better job than if decisions are made for them by a committee.

@cremeegg This may be the case, but currently it is impossible for an individual to make a 25 year plus decision when the mortgage contract is so heavily weighted in favour of the bank. It is not possible to give any reasonable assessment today as to what the best bank will be in 6 months time, never mind 6 years.
if I go to buy a car tomorrow morning, its a point in time transaction, and once the transaction is made that's it. The deal is done. The same does not apply for SVR mortgages, and I can be left with the legacy of this incorrect decision for many years to come

These factors would change over time. Not the value of the factors but the actual factors. Who would have the authority or incentive to respond to these changes.

Fair point - then maybe a 5 year review of these factors, and any mortgage taken out 3 months after the review has taken place have to use the new factors.

Ultimately its about allowing the customer some ability to clearly compare mortgage products over the life cycle of the mortgage (rather than day 1), and allowing the bank reasonable input into the process.

Without some level of 'control/benchmark' then the banks are free to charge what they like, and the customer will always be the 'victim'

It is worth noting that if you look at the interest rates today, KBC are the lowest by a good bit especially if you factor in the 0.15% cut mooted, but they don't pass on their rates to existing customers. Its obviously easier be cheaper when you treat existing customers so poorly

 

[Brendan Burgess]

So, let me see if I understand you correctly.

The Central Bank publishes a Standard Rate - let's say 3% today.

AIB says that it will charge customers borrowing >80% LTV the Standard Rate for the life of the contract.

The ECB rate or costs of funds in the market generally rises, so the CB increases the rate to 4%. AIB has no further discretion. It increases its rate to 4%.

ptsb says that it will charge customers with LTVs <50% the SR -0.5%. So they charge 2.5% today. And that will rise to 3.5% when the CB raises the SR to 4%.

Brendan

 

[cremeegg]

currently it is impossible for an individual to make a 25 year plus decision when the mortgage contract is so heavily weighted in favour of the bank.

It is reasonable that the mortgage contract protects the bank, after all they hand over a large amount of money day one. All they get in return is the contract.

In practice, the contract terms are unenforceable by the bank. As we see from Brendan's visits to court, a bank will go a number of years without repayment before they can enforce the security provided for in the mortgage.

Its not just the borrower who has a 25 year commitment the bank is also tied in for 25 years. They cannot say after 7 years, the borrower has lost their job, they are no longer the high quality borrower they were when we made the loan. We want out money back.

 

[cremeegg]

I firmly believe that introductory discounts should be banned.

Banks should be prohibited from offering different rates to new and existing customers.

There should be a mortgage switching scheme, to make it easy for borrowers to switch banks, where they can find a new lender willing to lend.

 

[gnf_ireland]

So, let me see if I understand you correctly.

The Central Bank publishes a Standard Rate - let's say 3% today.

AIB says that it will charge customers borrowing >80% LTV the Standard Rate for the life of the contract.

The ECB rate or costs of funds in the market generally rises, so the CB increases the rate to 4%. AIB has no further discretion. It increases its rate to 4%.

ptsb says that it will charge customers with LTVs <50% the SR -0.5%. So they charge 2.5% today. And that will rise to 3.5% when the CB raises the SR to 4%.

Brendan

Yes, Brendan that's exactly it. It means that the Central Bank publishes a single SVR rate and each bank is allowed to set their individual mortgage products based on this rate.

In the event the cost of funds in the market generally increases, each bank are naturally going to increase their SVR in any event. Some banks may do it by 1.5%, and others by 0.9% - but at least this would be 'standardised' and also apply to all customers in a fair and equitable manner.

The other benefit is the SVR increases have to be 'justified' against an agreed set of criteria, and can only be considered once every quarter. Currently in scenarios like this, SVR customers are at the mercy of the bank - literally !

It would avoid issues such as the Permanent TSB scenario around the very high SVR rates, impacting customers of a single bank.

 

[gnf_ireland]

In practice, the contract terms are unenforceable by the bank. As we see from Brendan's visits to court, a bank will go a number of years without repayment before they can enforce the security provided for in the mortgage.

@cremeegg to be fair this is a separate issue. I think all rational people will tell you that the banks are exposed currently on what is in effect unsecured debt. However this does not mean the solution is to increase the SVR rate for those who do pay. The answer is to tackle the issue of repossessions.

If in the definition of the SVR rate, the banks say there is currently a 0.75% load factor being placed on every SVR mortgage in the country due to the inability to reprocess properties, I would consider this to be a good thing. It might allow for a rational conversation to exist about why so many customers are paying a 0.75% premium so others can stay in their houses without paying anything? If this load factor was to reduce over time due to changes in the rules, this again would benefit all customers based on the single SVR calculation method proposed
[Note: 0.75% is just a number I have used for illustrative purposes]

It is reasonable that the mortgage contract protects the bank, after all they hand over a large amount of money day one. All they get in return is the contract.

Its not just the borrower who has a 25 year commitment the bank is also tied in for 25 years. They cannot say after 7 years, the borrower has lost their job, they are no longer the high quality borrower they were when we made the loan. We want out money back.

I agree with you on these points, but I think we are digressing here. I am not sure how the two points make a material difference to the setting of the underlying SVR rate - whether individual banks do this or whether its done centrally. A single customer losing their job or whatever should not change the SVR rate for others. It should be based on general market trends.
If for example, Bank A has a bad debt ratio of 5% and Bank B has a bad debt ratio of 9%, who should pay the penalty? Should it be the customers who got a mortgage from Bank B in the good faith that they would adhere to reasonable lending rules etc?
My point is, if Bank A keeps their bad debts below the average then they should be more profitable as a result; if Bank B does not, they would be less profitable. Currently both would just continue to rise their SVR rate to cover the losses, which I think is unfair

My position is not that banks should not have a charge on the underlying asset, not that they should not be able to repossess in a reasonable manner etc. My point is where a common SVR set across all banks would allow customers to fairly assess all mortgage products for a reasonable period of time and would also make better managed banks more profitable - as they would potentially get 'additional' rises in the SVR rate.

What I am trying to avoid is 'badly run banks' using SVR customers as a means of recouping losses from other areas, as they are an easy target !

 

[gnf_ireland]

I firmly believe that introductory discounts should be banned.

Surprise Surprise, we disagree on this one I have no issue with the P-TSB scenario of offering 0.5% discount for the first 12 months. I also have no issue with the 2% cashback option either.
My issue with both (and in general) is there is no clear means of comparison for an extended period of time.

Lets say, CB SVR rate is 4%
BOI offer CB SVR rate & 2% cash back
AIB offer CB SVR rate - 0.75%
P-TSB offer CB SVR rate - 0.5% & 12 month introduction discount of 0.5%

Which would you take ? It should be done to personal choice as to which to avail of, but it is possible to easily quantify the differences between these offers, both in terms of year 1, year 2 and year 5. The differences remain the same, because the underlying base is common. This is the part that makes this comparison impossible currently

 

[gnf_ireland]

Banks should be prohibited from offering different rates to new and existing customers.

There should be a mortgage switching scheme, to make it easy for borrowers to switch banks, where they can find a new lender willing to lend.

These two points I completely agree with. I think it is shocking that the likes of KBC can get away with behaving the way they are. A <80% LTV product should always be a <80% LTV product, and the same applies to a <60% and <50%.

To me this is the biggest area which I feel our government and Central Bank have let us down


Regarding the Mortgage Switching Scheme - I spoke to my solicitor about this when I moved, as it had been less than 4 years since my initial mortgage. The issue with creating switching schemes is that Solicitors are legally responsible to ensure everything is above board.
The only area I could see that would benefit here would be to have common 'legal searches' and common 'mortgage contracts' with the variations in appendixes only. This may reduce the effort and time here. However, the overall cost of switching was not 'terrible' given some banks pay the associated legal fees for it.

A common mortgage application process across all banks may assist this, but in reality I do think its only fair a bank should do due diligence on a customer before handing over that cost of money

 

[Brendan Burgess]

I have thought a bit about this and every system has its problems

The current system
The borrowers are at the mercy of their banks. ptsb can hike the rates to over 6% and no one can do anything about it.
Bank of Ireland and KBC can increase the rates on existing customers while reducing rates to attract new customers, and there is nothing that anyone can do about it.
Danske Bank or any of the vulture funds could hike the rate to 10% which would force many people into arrears and force them to sell their homes, and there is nothing anyone can do about it.

So this is not acceptable.

My suggestion of allowing banks charge up to 3% above the ECB rate, but needing CB approval to charge more than this.
I think that this would work well, except that the rate of 3.05% is still a full percentage point above the rates available in the rest of the eurozone.

Oblige banks to offer tracker mortgages tracking ECB or Euribor
If AIB is charging 3.5% today, why not express that as ECB +3.45%?

Of course, it's still too high, so it doesn't solve the problem.

If banks were forced to offer trackers, they would charge more for them.

GNF's proposal of a Central Bank SVR
It solves the problem banks face with tracker mortgages that Costs of Funds could lose contact with ECB.

As a lender, I would worry that the CB would not allow fair increases for political reasons. As a borrower, I would fear that the CB would push up the prices to protect the profitability of the banks. They could also increase rates to dampen the house price market.

Variation of GNF's proposals
Oblige lenders to offer tracker mortgages. But they are free to set the margin. The Central Bank would have the power in exceptional circumstances to intervene i.e. Allow an increase in margin if the cost of funds loses track with ECB rates

Make the tracker margin fixed for 5 years and conditional on the loan being performing. At the end of 5 years, the bank would have the option to reprice the loan.

 

[cremeegg]

AIB offer CB SVR rate - 0.75%
P-TSB offer CB SVR rate - 0.5% & 12 month introduction discount of 0.5%

Which would you take ?

I would take the AIB offer. On a €200,000 mortgage it has €6,500 interest. I would not take the PTSB offer €6,000 interest year 1 €7,000 every year thereafter.

Anyone else would make the same choice, unless they were swayed by the advertising behind the PTSB offer.

However this is also a digression from your main suggestion

 

[gnf_ireland]

@Brendan Burgess yes, the underlying principle of what I am proposing is effectively a tracker mortgage, that allows customers to compare the products not just now, but into the future. The reason I proposed the common SVR rate as opposed to ECB as I am sure the banks feel ECB is not an appropriate benchmark to use currently

Make the tracker margin fixed for 5 years and conditional on the loan being performing. At the end of 5 years, the bank would have the option to reprice the loan.

I also have no issue with this part, although 5 years is a long time for some. Someone who took out a mortgage in 2006 could be in a very different position in 2011. How do you protect against these customers being 'unfairly penalised' by the proposal. I think there would need to be a 'maximum/fall-back' interest rate included in the mortgage contract, in terms of both performing and non-performing loans.

Absolutely no issue with the condition on the loan being performing !


The only downside of this approach as I see it is the banks will continue to offer different trackers, and how to you 'force' the banks to offer the same trackers to new and existing customers? Or are we saying that you sign up for the tracker rate for 5 years, that's the tracker rate you keep unless you switch ?

So today if I signed up to KBC on ECB +3.2% and tomorrow they offered ECB +3.05% - its tough on me? I am fine with that in principle, as long as it was understood that each 'tracker' rate is effectively a personal contract, unlike SVR which is supposed to be 'standard'.

 

[gnf_ireland]

Anyone else would make the same choice, unless they were swayed by the advertising behind the PTSB offer.

I am sure customers have reasons for accepting introductory rates all of the time, and the same with the cashback offers. However, I believe it should be up to people to make these choices. Personal responsibility is a great thing

But yes, we digress !

 

[Brendan Burgess]

I also have no issue with this part, although 5 years is a long time for some. Someone who took out a mortgage in 2006 could be in a very different position in 2011. How do you protect against these customers being 'unfairly penalised' by the proposal.

Hi gnf

This variation of your proposal protects everyone for 5 years.

It doesn't protect those who can't move after 5 years. But 5 years protection for all is better than no protection for anyone. I don't think that your original proposal of a lifetime tracker would be acceptable to lenders.

The only downside of this approach as I see it is the banks will continue to offer different trackers, and how to you 'force' the banks to offer the same trackers to new and existing customers? Or are we saying that you sign up for the tracker rate for 5 years, that's the tracker rate you keep unless you switch ?

I sign up today to ECB + 3.2%, the margin being fixed for 5 years ( or three years.)
If the lender brings out an ECB + 2.5% tomorrow, tough on me. I am locked into my margin of 3.2% for the lock period.

Of course, as it's a variable rate loan, I can switch to another lender without penalty.

After the lock period is up, I can avail of a new lock.

I think that this would be a great product. Irrespective of whether the Central Bank or the government changes the legislation around mortgages.

Brendan

 

[gnf_ireland]

I think that this would be a great product. Irrespective of whether the Central Bank or the government changes the legislation around mortgages.

I agree that would be a great product - at least it would allow a level of comparison for a period of time

That said I am also in favour of offset mortgages, but have conceeded these have gone the way of the dodo

But 5 years protection for all is better than no protection for anyone.

Agree, as long as there were some 'limits' on what the customer would come back to after the 5 years were up, especially if their circumstances changed? We don't want them to end up being gouged by banks if they are in negative equity or their income has dropped by say 25% in the meantime, but are still making their payments

 

[gnf_ireland]

I don't think that your original proposal of a lifetime tracker would be acceptable to lenders.

What do you mean my suggestion is not perfect