This is the article as submitted. They may have edited some of it.
In well-functioning , competitive mortgage markets across Europe, mortgage lenders compete for new business by having low rates.
But in the dysfunctional Irish market, many lenders don’t compete on rates. They offer customers 2% cashback when they draw down their mortgage. Customers are confused by this. They seem to think that it’s a present from the bank and don’t realise that they will pay for it many times over by way of a much higher mortgage rate than they would pay with a non-cashback mortgage. And even if some borrowers do see it for the trick that it is, they avail of it because it helps them to get around the Central Bank’s limit of 90% Loan to Value.
The Competition and Consumer Protection Commission has said “it could be argued
that [cashbacks] represent a sophisticated attempt to manipulate consumer behaviour and may result in consumers making decisions for short-term gains that over the medium or long-term are not in their best interest.”
Another trick used by some lenders is to reduce rates to attract new customers, but to restrict these rates to new customers only. So existing customers don’t benefit from what little competition there is in the Irish market.
The outcome of this dysfunctional market is that the average rate for a new mortgage in Ireland is 2.72%, which is over twice the average rate for the eurozone area of 1.27%. The difference of 1.5% on a €300,000 mortgage is €4,500 a year or nearly €400 per month. Over the 20 year term of the mortgage, this difference will cost the Irish borrower dearly.
The Central Bank sees nothing wrong with cashback. They have a Consumer Protection Code whose first principle is that customers must be treated fairly. Yet they see no conflict between this principle and the practice of confusing customers with 2% cashback and charging them higher rates for the rest of the mortgage term. Nor do they see any conflict between the requirement to treat customers fairly and the practice of reducing rates for new customers but not passing on these cuts to existing customers.
Bank of Ireland was the first to offer 2% cashback. They also have a non-cashback mortgage which is 0.5% cheaper than the cashback equivalent. But this is restricted to new customers – existing customers are stuck with the high rates.
Bank of Ireland is now seeking to acquire KBC’s mortgage book as KBC leaves Ireland.
KBC has the opposite business model to Bank of Ireland. It does not offer cash back to attract new customers. If it reduces its rates for new customers, existing customers can also avail of them. As a result, KBC’s rates are significantly lower than Bank of Ireland’s. A KBC customer whose €300,000 mortgage is acquired by Bank of Ireland will pay about €2,100 more interest per year after the acquisition.
Bank of Ireland will be considering how best to hold onto these customers while charging them much higher rates than they would have paid with KBC. But they know that the Irish mortgage customer is generally not rate conscious and lethargic and so they will do the calculation that they can move the ex-KBC customers to higher rates and few of them will actually go to the trouble and expense of switching to a cheaper lender. And furthermore, they know that about 20% of the customers will be unable to switch as they have a restructured mortgage or a change in their financial circumstances since they drew down their mortgage. These will be captive to Bank of Ireland and will have to pay whatever rate Bank of Ireland decides to charge them.
Now the CCPC has an opportunity to act on its reservations about cashback. They are conducting a Phase 2 Investigation into Bank of Ireland’s proposed acquisition of KBC’s mortgage book. They can approve this acquisition ; they can veto it; or they can approve it subject to conditions.
The departure of KBC will lead to a reduction in competition. But vetoing the acquisition won’t benefit anyone. If it is vetoed, KBC will depart anyway and will sell their mortgage book to a fund. Customers are better off with an active lender rather than being with a fund which is not subject to any market discipline whatsoever.
The CCPC should approve the acquisition subject to the condition that the KBC operation be managed at arm’s lenght from the rest of Bank of Ireland and that it maintains its existing lending practices of no cashback and passing on rate cuts to new and existing customers. The new operation should compete actively for new customers including being open to take on customers who wish to switch from Bank of Ireland’s higher rates.
There is a precedent for this. Bank of Ireland had a separate operation, ICS Mortgages, before the European Commission told them to sell it as part of the restructuring. And AIB has two subsidiaries with different lending policies and different rates – Haven Mortgages and EBS.
Of course, it would be much better if the CCPC could convince the Central Bank to ban cash backs and discrimination against existing customers. If banks were forced to compete on mortgage rates and mortgage rates alone, then we just might see some real competition in the Irish mortgage market and rates just might start falling towards the eurozone average.
Brendan Burgess is the founder of the consumer website askaboutmoney.com
www.thetimes.co.uk
