Irish banks should be reducing mortgage rates even as the ECB rate increases

Brendan Burgess

Brendan Burgess

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Here is a press release I have issued today

Irish banks should reduce their mortgage rates even as the ECB rate increases

Briefing note from Brendan Burgess, founder of Askaboutmoney.com and Fair Mortgage Rates campaigner

Irish families are already paying 1% more for new mortgages than the average rate in the eurozone. 1% doesn’t sound like a lot, but on a mortgage of €300,000, it is €250 more interest per month!

So rather than increasing mortgage rates, Irish banks should be reducing mortgage rates!

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But that does not tell the whole story.

Mortgage rates for existing customers are higher than the rates for new customers

  • Banks keep variable rates high but compete for new business with fixed rates
  • When the fixed rate term expires, customers default to the much higher variable rates
  • Customers on variable rates can fix again at lower rates, but many don’t know this or don’t get around to it
  • Some lenders e.g. Bank of Ireland and permanent tsb do not allow existing customers avail of the lower rates and deals on offer to new customers.
So what should customers do today?

If you are with Bank of Ireland or permanent tsb, you should start the process of switching to a cheaper lender such as AIB or Avant Mortgages. The savings are huge.

For example, an existing Bank of Ireland customer with a 50% Loan to Value is paying 3.9% variable rate. They could switch to Avant and fix at 1.95% - exactly half the Bank of Ireland rate. On a €300,000 mortgage, they would save €6,000 a year or €500 a month.

But if you are too lazy to switch or if you can’t switch, then you should go for a 5 year fixed rate which will be a lot cheaper than the rate you are paying.

Likewise, if you are with KBC or Ulster Bank, you should either switch or fix.

If you are on a variable rate with AIB, you should fix.

What should the government do?

Banks should be obliged to treat customers fairly

  • They should not be allowed to discriminate between new and existing customers. If they reduce their rates to attract new business, existing customers should be allowed to avail of these lower rates.
  • Cash-back should be banned. They allow the banks which offer them to keep mortgage rates high while attracting new customers with cash back. Bank of Ireland and permanent tsb would get little new business at their very high mortgage rates without tricking people with cash back.
Frequently Asked Questions

Should customers on variable rates fix their mortgage rate?

Yes. Irish lenders compete for business on fixed rates, and exploit the inertia of their customers by keeping variable rates much higher than the fixed rates. So, at the very minimum, customers on variable rates should

Should customers on trackers fix their mortgage rate?

In most cases, if they fix their rate, they give up their right to a tracker. So if they have a cheap tracker, e.g. a margin of 0.5% above ECB, with 20 years left to run, they should probably not fix. But if they have an expensive tracker, e.g. ECB + 2%, then they should probably fix.

Should customers with cash on deposit pay off their mortgage?

It is better to pay down your mortgage on which you are paying 3% than to leave your cash on deposit earning 0 %. However it may make more sense to maximise your pension contributions than to clear a tracker charging you ECB +0.5%.

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Source of Eurozone Average: Central Bank Interest Rate Statistics May 2022

There are about 600,000 mortgage holders in Ireland and they split roughly into

  • 200,000 on fixed rates – most of which are short term
  • 200,000 on trackers
  • 200,000 on non-tracker variable rates
 
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Hi @Brendan Burgess when I considered switching to Avant, it actually made more financial sense to stay with BoI* when considering the cashback still due, and fees to switch.

Is the comparison of rate to EU rates apples to apples? i.e. there aren't additional fees or costs in the Eurozone? Are Irish lenders still required to hold more capital than EU counterparts which drives a need for higher rates?

*I negotiated a 2.6% rate with BOI down from 2.9%.
 
Hi Dublin Bay

The main apples to apples distortion is the effect of cash back. It should be banned and that would solve the comparison problem.

Some of the overseas lenders have requirements to buy other products such as life insurance.

The requirement for extra capital contributes only a small part of the higher rates. But is an excuse to justify the whole additional cost.

There are many examples of dysfunction in the Irish market.

  1. Fixed rates are lower than variable rates in an environment when rates are expected to rise. That makes no sense other than to exploit customers.
  2. Irish banks are required to hold extra capital and are more risky, yet some banks have the same fixed rates irrespective of Loan to Value.
Brendan
 
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Typo here Brendan?

Should customers on variable rates fix their mortgage rate?

Yes. Irish lenders compete for business on fixed rates, and exploit the inertia of their customers by keeping fixed rates much higher than the fixed rates. So, at the very minimum, customers on variable rates should
 
Inertia really is a big factor with so many consumer decisions. Everyone is so busy checking boxes all day long that another transaction that is not demanding immediate attention just won't bubble to the top of the to do list unfortunately.

Nice post / release, I hope it get's plenty of airtime.
 
Brendan Burgess said:
Hi Dublin Bay

The main apples to apples distortion is the effect of cash back. It should be banned and that would solve the comparison problem.

Some of the overseas lenders have requirements to buy other products such as life insurance.

The requirement for extra capital contributes only a small part of the higher rates. But is an excuse to justify the whole additional cost.

There are many examples of dysfunction in the Irish market.

  1. Fixed rates are lower than variable rates in an environment when rates are expected to rise. That makes no sense other than to exploit customers.
  2. Irish banks are required to hold extra capital and are more risky, yet some banks have the same fixed rates irrespective of Loan to Value.
Brendan
Click to expand...

Thanks Brendan,

I have a suggestion to your but you may think it is out of scope. The actual process of switching needs to be made easier for consumers, there is not a consistent user experience. For example it is easy to say to switch to Avant but in practice and my experience it is much harder. The solution, there should be a standard switching process universal across banks in the irish mortgage market.
 
Dublinbay12 said:
For example it is easy to say to switch to Avant but in practice and my experience it is much harder. The solution, there should be a standard switching process universal across banks in the irish mortgage market.
Click to expand...

This has been suggested before.

But the reality is that the new bank must make a credit decision. And you can't standardise that. Avant's standards are very different to Bank of Ireland's. It's not like transferring direct debits.

Brendan
 
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