Central Bank: Mortgage switching activity remains low despite potential savings

Brendan Burgess

Brendan Burgess

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This report came out on 29th October. Surprised I didn't see it and no one else here seems to have noticed it either.


  • Three in every five eligible mortgages stand to save over €1,000 within the first year if they switch mortgage provider, and more than €10,000 over the remaining term.
  • Just 2.9% of mortgages switched provider in the second half of 2019.
  • A diverse range of factors may inhibit switching, including psychological factors, lack of knowledge on the costs and benefits, and the perceived complexity.

72% could cut their repayments by at least 10%

60% could save at least €10k over the remaining term of their mortgage

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I had missed the word eligible in my first reading. I was surprised that the savings were so high.

For the purposes of the Letter, a customer is defined as eligible for mortgage switching if
  • they hold a variable rate product (excluding tracker mortgages) or a fixed rate product with fewer than 12 months of fixation remaining.
  • Research sample is restricted to those accounts
    • with a current outstanding balance of at least €30,000,
    • a loan-to-value of below 90%,
    • no outstanding mortgage arrears,
    • and classified as ‘performing’.
 
The paper shows that there is much more scope to save for variable customers than fixed-rate customers

About a third of variable customers could save >€1,000 a year compared to about a tenth of fixed-rate customers.

I was astonished to see there are so many customers on variable rates at all. Fixed rates have been better value for half a decade now.
 

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This is a comparison of the characteristics of a switcher's mortgage after the switch with those who don't switch. It would have been interesting to see the characteristics before the switch, but that would be difficult to pick up.

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Apparently the higher score means that this group is more inhibited about switching.

So the people who took out mortgages between 2000 and 2007 are very inhibited about switching.

This probably makes sense as this group
  • is most likely to be on a tracker
  • is most likely to be in negative equity
  • is most likely to be in arrears

Brendan
 

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Switchers tend to have higher average mortgage balances, higher average valued properties,
and shorter remaining mortgage terms.


This is a bit odd.

Those with shorter remaining terms have lower mortgages and lower potential savings.

All other things being equal, you would expect that those with shorter remaining terms would be less likely to switch, as the mortgage balance would be lower and the savings a lot lower.
 
This study was done with a view to informing policy. I am not sure if they have learned anything from it which informs policy.

For me there are two questions:

  1. Why do so many people who could avail of a cheaper rate from their current lender not do so?
  2. Why do so many people who could avail of a cheaper rate by switching lender not do so so?

Why do so many people who could avail of a cheaper rate from their current lender not do so?

A few of us campaigned for a long time to bring down the extraordinarily high SVR charged by permanent tsb. Eventually, they allowed existing borrowers who were on 4.5% to avail of a lower LTV rate.
ptsb even paid for the valuation as far as I remember.

All a borrower had to do was to get the list of valuers and arrange an appointment. If there was a form to be filled it, it was not complicated.

And they moved quickly to a lower rate.

I was shocked when, a year or two later, only 20% of borrowers had availed of this. ptsb had written to them twice explaining it in simple terms.

BoI still has many customers paying 4.5%. They can fix for one year at 2.9% irrespective of their Loan to Value. You might argue about the merits of fixing for two years instead of one year or 5 years instead of 1 year, but fixing for one year is clearly better than a variable rate of 4.5%.

KBC has even bigger gaps. If I recall correctly, only 20% of KBC mortgage holders have a current account with KBC. They get an automatic discount of 0.2%. On a €300k, mortgage, that is €600 a year.

So the policy question is whether you should protect people from themselves?

AIB in contrast to the other lenders passes on rate cuts automatically to their customers.

The most any customer of AIB is paying is 3.15% - compared to 4.5% for many BoI customers.

Should it be a requirement that lenders have to price their products in manner which does not exploit customers?

I think it should be a requirement, but I don't know how it could be done.

Firstly, lenders should be required to make all deals on offer to new customers available to existing customers. But even still the customer has to ask for that deal.

Should lenders be obliged to offer a variable rate in some way proportionate to their fixed rates? If BoI is prepared to offer existing customers a fixed rate of 2.9% irrespective of their LTV, should the maximum variable rate be tied to this in some way?
 
Why do so many people who could avail of a cheaper rate by switching lender not do so so?

I could explain this by the way in which lenders price products in a very confusing manner?

If I want to switch from ptsb , should I switch to Avant for a low variable rate or maybe to BoI and fix for 5 years and get 3% cash back?

Is Avant reliable?

It's a bit like health insurance - the complexity of the offerings cause inertia.

Car insurance is much clearer. I am paying €500 for the next year for my insurance with Company A. If Company B charges me €400 for the same cover, I will renew with them instead.

Mortgage products should be simplified

Cash backs should be banned. They have no rationale other than to confuse customers and to charge existing customers higher rates. Banning them would force lenders to compete on mortgage rates alone.

Lenders should be obliged to include and highlight their variable rates in all adverts. Or maybe their "Standard Variable Rate" which would be the rate charged to customers borrowing less than 80% LTV. They would price other LTVs off this rate so the 90% LTV rate could be SVR + 0.5%
 
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There are 2 figures that jump off the page here for me and they are:
  • Just 2.9% of mortgages switched provider in the second half of 2019.
  • 244k/674k: 36% of all mortgages are trackers

This is probably more relevant to the other discussion on mortgage rates (Variable rates) but we are not going to see better rates or more competition until the percentage of switching increases and trackers start to decline. Avant are clearly aware of this and it is why they are so selective with their location/valuations etc. They are not looking to take over a large chunk of the market. If switching was more common, there would be more opportunity for a larger competitor to easily take a modest market share

In terms of switching inertia:
  • Another major factor for many when switching are the high follow on rates. A lot of the better fixed rates have high follow on SVR. I think this scares a lot of people that the short term saving could be a long term loss. The 'ideal' candidates for switching are those in their 30's who have high mortgage balance with lots of potential to save but they need to weigh this up against lifestyle changes, cost of dependents etc. I think many are afraid that their circumstances could change drastically in 3-5 years (e.g. having kids) and would no longer be able to switch. It's not as easy to just say we should all switch every 2/3 years to maintain the best rates
 
_OkGo_ said:
  • Just 2.9% of mortgages switched provider in the second half of 2019.
Click to expand...

So an annualised 6%. I don't think this is particularly low! Electricity switching is only a bit more than double at 13.5%, and it is a much, much easier process.

There is inertia in all sorts of markets, but remember prices are set by the marginal customer, not the average one.

There are plenty of rates on offer from a material selection of banks. Indeed customers can, and do, switch.

The switching rate is not the main reasons for the high interest rates in Ireland, this is due to banks' capital costs and cross-subsidising trackers.
 
I make two points:

(1) the lack of PTSB customers on the high SVR doing an internal switch is very odd. I wonder does Pete Lunn of the ESRI know about this case. It seems like a good example of behavioural economics.

(2) on the issue of a lack of switching to a different bank, surely the legal fees, and the time/hassle of getting a sol, etc. are an issue? I wonder could that process be streamlined?
 
shweeney said:
why can't I give my potential new mortgage provider details of my existing mortgage and bank accounts and authorise them to access the last 6 months of transactions
Click to expand...

Because your mortgage provider would have to employ someone to download statements, label them, archive them, and share them internally.

This is just the bank outsourcing work to you. Underwriting is labour intensive and not very easy to automate.
 
NoRegretsCoyote said:
Because your mortgage provider would have to employ someone to download statements, label them, archive them, and share them internally.

This is just the bank outsourcing work to you. Underwriting is labour intensive and not very easy to automate.
Click to expand...

they have to do the highlighted bits anyway.

my point stands, the CB introduced a switching system for current accounts to make it easier. They haven't done it for mortgages, so it's not a surprise people aren't switching in bigger numbers.
 
@shweeney

But it's a fundamentally different undertaking.

For the bank a current account is a liability. A mortgage is an asset.

Switching mortgages means a bank extending a completely new loan. That means they have to carry out due diligence as they would with any other.

Underwriting is more than just looking at bank statements.
 
for the customer assembling the documentation is the biggest hassle - the last time I switched (about 4 years ago) I had to go into several different banks branches to get certified statements, like it was still 1973. Since then, the number of physical branches has reduced, those that are open might only have one member of staff dealing with the public.

this could make it easier. I don't expect the banks to do this voluntarily, the CB needs to put the system in place.
 
Absolutely.
Such hassle this week trying to get insurance indemnity forms and everyone telling me it cant be done until this that or the other. Have spent the whole morning on the phone and no one has been able to do anything for me until someone else does something first. I really abhor switching and am only doing it because of bank doing me out of my tracker so constantly trying to get a decent rate. This is my third time to switch, last two were disasters. First one I lost my tracker due to ptsb suddenly changing what a tracker was, and second one I fixed when rates were going up, only for them to start coming down and down and down. Now on a variable and switching to a 2.25 fix for three years. Hope it's my last

Why cant mortgages for principal homes not be more regulated and not allowed to be more than a certain rate over ECB. Would make the need to switch unnecessary.
 
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