"Consumer Commission opposes cap on mortgage rates"

Brendan Burgess

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Consumer watchdog opposes new law to cap interest rates on variable mortgages

"In a submission to an Oireachtas committee considering the bill, the commission said a mortgage rate cap would lessen competition in the market.

The commission said it "has serious concerns about the proposal and believes that, if enacted, the bill would likely limit competition in the market for principal dwelling house mortgage loans, thereby acting to the detriment of the very consumers that it wishes to protect".
 
The absence of a cap certainly hasn't led to a level of competition whereby Irish mortgage holders aren't being fleeced. We should try some kind of a cap as what we have now feels like an informal cartel.
 
The World Bank report says "If a regulation of interest rates is necessary, ceilings should be specific to certain products . . the cap should be set at a reasonable level, which means high enough to allow lenders to make a profit but low enough to eliminate excess profit due to the lack of competition.". I think this perfectly fits the Irish mortgage market - our excessive rates necessitate regulation.
 
"The [World Bank] paper finds at least 76 countries around the world currently use some form of interest rate caps on loans—all with varying degrees of effects, including the withdrawal of financial institutions from the poor or from specific segments of the market, an increase in the total cost of the loan through additional fees and commissions, among others. The paper concludes that there are more effective ways of reducing interest rates on loans over the long run and of improving access to finance: measures that enhance competition and product innovation, improve financial consumer protection frameworks, increase financial literacy, promote credit bureaus, enforce disclosure of interest rates, and promote microcredit products. "

Don't get me wrong - I favour the introduction of a relative rate cap along the lines of the French model (rates capped at 133% of the average rate charged on all outstanding variable rate home loans (including trackers) in the preceding quarter).

What I disagree with is the proposal in the FF Bill to give price-fixing powers to the Central Bank, which I believe will ultimately be harmful to consumers.
 
I'm not hugely surprised that a World Bank report suggests that countries don't meddle with banks. I'd view it more as broad-brush than extensive. Many of the countries are basket cases. I don't know what kind of cap would be best but surely it's time to try some cap given the uniformly high Irish mortgage rates.
 
I'm not hugely surprised that a World Bank report suggests that countries don't meddle with banks.
Why? The World Bank supports developing countries through granting low interest loans, policy advice, etc. It has absolutely nothing to do with regulating commercial or retail banks.

I'd view it more as broad-brush than extensive.
I don't know how you could possibly consider a detailed review of interest rates caps in 76 countries to be "broad-brush". These include a number of OECD countries (Germany, the Netherlands, etc.).

Why would you "try" a policy if all the available evidence indicates that it would be counter-productive?
 
The fact that I have been impaled on my glib comments notwithstanding, Irish mortgage rates are too high relative to other eurozone countries. We already have in place many of the measures the World Bank suggests for reducing interest rates in general. We shouldn't expect any altruism from the banks, and inertia won't yield fairer mortgage rates.
 
Irish mortgage rates are too high relative to other eurozone countries.

Actually, the average rate charged on all outstanding floating rate home loans in Ireland is pretty much bang in line with the equivalent Eurozone average figure. It's the average variable rate charged on new home loans that's materially higher than the equivalent Eurozone figure. Of course our default rates are also dramatically higher than anywhere else in the Eurozone.

I absolutely agree with you that nobody should expect altruism from banks - they are commercial organisations at the end of the day - and customer inertia definitely won't produce lower rates. However, it doesn't follow that crude price-fixing is the answer.
 
Ignoring default rates or any other closely related factors, and just looking at the Variable Rate product. I've said it before on these forums. A variable rate means that it should vary, both up and down. If new customers are getting lower variable rates e.g. 3.5% while existing customers are held at 4.25%, then in my opinion the existing customer is not on a variable rate. A rate that only goes up or stays the same is a fixed rate in my book.
Though not linked directly to it.. if the ECB rate were to rise in the morning then I'm sure you would see the variable rate rise too. While there are reasons for not having a cap, there should be implementations to stop discrimination on new and existing. Note: I'm only referring to Standard Variable rates here, LTV's at least make sense with the value of the property becoming a factor. Several different "standard variable" rates to customers however is in my opinion unfair. Especially to those who cannot move bank due to whatever circumstance, be it negative equity or other factors.
 
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