gnf_ireland
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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
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