Central Bank report on Switch and Save

The CB has published a report this morning on this topic.

See attached

It's hard to know where to start with rubbish like this.

It looks at three lenders only AIB, Bank of Ireland and permanent tsb but talks about banks in general
It looks only at the savings from switching from one variable rate to another but ignores the options of fixing.
It is already out of date.

Why does it not look at the lenders individually?

There is no point in giving aggregate information where there are only 3 constituents.

AIB
AIB accounts for almost 48% of the market. There is very little to be gained by an AIB customer switching to a variable rate with another lender. Sure they could make some short term savings by switching to KBC - but KBC treats its existing customers disgracefully. If and when AIB reduces its rates later this year, existing customers will benefit. KBC will probably continue charging 4.5% to those customers who can't move.

permanent tsb
While the Central Bank researchers were doing their research in the ivory tower that is Dame Street, it might have appeared to make some sense for a permanent tsb borrower with a low loan to value to switch to KBC as they were about 0.7% cheaper. The Central Bank guys would work out that you would save €10,000 over the life of a mortgage with this rate cut. But now ptsb has made its rates for new customers available to existing customers, so people who switched from ptsb to KBC may well be regretting it very shortly.

So the CB report is not only flawed, it's just way out of date already.

Bank of Ireland
Bank of Ireland has the highest SVR at 4.5% so the CB would show a significant saving by switching. But there is probably little to be gained by switching as if you have a low loan to value and you threaten to switch Bank of Ireland will reduce the rate for you to a lower rate, so that it is no longer worth switching. This was their practice while the researchers were working on this, and this is their practice now.

Even if you worked out that switching from BoI to another lender were worthwhile, you also have the option of fixing with Bank of Ireland. This might achieve an even lower rate than switching to another lender.

My overall point is that aggregated research like this is meaningless. One has to look at each lender and work out whether switching is a good idea.

So why did the Central Bank produce this report?

I suspect it is a smokescreen aimed at blaming customers for the high rates being charged by Irish banks. It suggests that if only we would get off our backsides and switch lenders, rates would come down and another lender would come into the market.

So the borrowers are to blame for the high rates they are being charged, not the lenders.

Bizarrely they show the number of switches since January 2014. The market has changed completely since July of last year when the Fair Mortgage Rates Campaign outed the Central Bank's misleading reports on interest rates. They claimed that new business rates were around 0.5% higher than in the rest of the Eurozone. But the Central Bank was including tracker mortgages in their new business figures. Since January they have been telling the truth. Irish rates are twice the rates in the rest of the Eurozone.

Now let's look at some of the other lenders not covered by the report

KBC
If you are an existing customer with KBC and have a low loan to value you are paying 4.3% ( or 4.5% if you don't have a current account with them.) This must be very frustrating and insulting when you see KBC offering new customers 3.5% plus the costs of switching and cheap home insurance. They will not reduce this variable rate for you even if you threaten to leave. You can fix at 3.9% for two years, so the only way to lower your variable rate and stay on a variable rate is to switch lender, which you should do immediately.

Ulster Bank
Ulster Bank treats its existing customers fairest of all. If you took out aloan when your mortgage was 90% LTV and repayments and price increases have reduced your Loan to Value to 60%, you can apply for this rate which is 3.8%. You can reduce your rate by 0.1% by switching to ptsb, but it's hardly worth it.

Danske Bank
Danske Bank is charging its Standard Variable Rate customers 4.95%. They are exiting the market and so they will not reduce the rate for you to hang onto your business. If you can switch, you should switch.

Dilosk - formerly ICS
They will reduce the variable rate if you threaten to move lender.

Bank of Scotland
Most BoSI loans were cheap trackers or variable rate mortgages with a ceiling, so it's very unlikely that you can save by switching.

random2011 said:

What about those in NE which may be the majority. There is no chance of switching.

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My first thought exactly when I heard this report mentioned in the news this morning.
Those in NE, arrears and/or with a poor credit rating can't switch and yet may be getting gouged by their existing lender thus exacerbating their situation.
What would the CB suggest for these borrowers?

Brendan - the report deserves criticism but on the point of it being out of date surely they have to pick a point in time and report on it and if things change in the meantime then there may be inaccuracies. That's to be expected? Didn't PTSB only announce new rates and equal treatment of new and existing borrower this week in which case it's hardly surprising that the report doesn't take account of that info?

ClubMan said:

Brendan - the report deserves criticism but on the point of it being out of date surely they have to pick a point in time

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Hi ClubMan

This report has been out of date for at least two weeks.

I don't mind it going out of date after it's released, but they should not publish a report which is out of date by the time of publication.

It's not as if they had printed thousands of copies.

Brendan

Asked whether it would be better to keep interest rates high to keep banks profitable before they are sold, Mr Noonan said banks would be able to reduce their underwriting costs if people switched to fixed rate mortgages - and could then give better value to customers.

He said there were reductions of between 0.75% and 0.8% to be found, which would throw up savings on a sizeable mortgage.

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This is what Noonan said today - http://www.rte.ie/news/business/2015/0717/715473-noonan-budget/

It looks like he is happy with the fixed rate solution.

Must say I'm surprised at the negative reaction to the Central Bank's analysis.

The Central Bank analysed over 500,000 PDH loans, representing 69% of total PDH mortgage accounts outstanding at end-Q1 2015. By any standards, that's a statistically significant cohort of borrowers!

Of this group, the Central Bank concluded that 21% were in a position to switch mortgage providers and would materially benefit financially from doing so. Would this percentage figure change materially if the analysis was carried out today (17 July 2015)? Perhaps but I doubt it given the enhanced switcher offerings announced by some lenders in recent weeks.

The analysis goes on to cite various observed aspects of behavioural economics to explain the reasons why borrowers do not switch providers when it would be in their financial interest to do so.

You could, of course, argue that the analysis is a pointless academic exercise but it does highlight the fact that there are tens of thousands of mortgage borrowers that are needlessly paying high interest rates due to their own inertia. If nothing else, it seems to me that highlighting this simple fact is worthwhile.

Well done Burgess on your analysis. Maybe the 'experts' in the CB didn't get the same education as you. If I might suggest critical analysis of official gobbledygook reports is something AAM should do more. Consumers need independent analysis.

Bronte said:

Well done Burgess on your analysis. Maybe the 'experts' in the CB didn't get the same education as you. If I might suggest critical analysis of official gobbledygook reports is something AAM should do more. Consumers need independent analysis.

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I really don't understand Brendan's argument.

I've just listened to the Morning Ireland piece and Brendan said that anybody who switched from PTSB's SVR to a bank like KBC rate would probably be feeling quite sorry now.

Why?

A borrower with an LTV of 60%, to take one example, would have moved from a rate of 4.5% to 3.55% and the switch would have cost nothing (or next to nothing) on a net basis. If that borrower had stayed put, they could now move to a "managed variable rate" with PTSB of 3.8%, which is still higher than 3.55% and they would have missed out on the interest savings in the intervening period. In other words, a borrower in that position came out ahead by switching at that point in time and would still benefit by switching now.

Brendan argued that if you're with AIB there's no point switching. Well, if you have an LTV of 60% you could drop your rate from 3.8% to 3.5% by switching to KBC and you would probably end up with a cash bonus of around €500 for your trouble, having discharged all switching costs.

And that just deals with switches from one variable rate to another. If a borrower is prepared to fix for a period, a switch to BOI would result in a cash payment equal to 2% of the outstanding mortgage amount and some of the most competitive fixed rates on the market. Ulster Bank and PTSB also have attractive switcher offerings for fixed rate mortgages.

The Central Bank analysis is undoubtedly academic but it is hard to argue with the core conclusion that there are tens of thousands of borrowers that are in a position to switch and would benefit financially from doing so.

That's hardly gobbledygook!

Maybe the point is that of those two banks neither of which is offering these rates to existing customers so after the year you would revert to the existing customer rate and be screwed over unless you switch which costs time and money. I would be very dubious of switching to banks that aren't looking after there existing customers because you eventually become one! On fixed rates your switching at a time of movement in rates and therefore could be caught on a fixed rate higher than a variable that may come available in say September after the minister has spoken to the banks again and you are locked into that bank unable to move for 5 years and considering BOI are another bank not matching rates for their existing customers would you want to be stuck there for 5 years. AIB seem to be the only banking that treat all the customers the same and was among the first to make cuts.

I am reading this report again and I had not noticed this comment:

"The main factors eliminating people from the switching process are small loan values
and the existence of an arrears balance on the account in the past 12 months. "

What has 12 months got to do with it? If anyone had arrears on their mortgage or missed payments on any other loan, they will not be able to switch.

Am I reading it wrong?

Brendan