This is my first draft of a briefing note on the issue
Briefing note on KBC sale to Bank of Ireland
Brendan Burgess
Founder askaboutmoney.com
Very bad news for mortgage holders
While the Minister for Finance is technically correct that the rights of the borrowers are unaffected, the reality is that the rights of the lender are not affected either. And Bank of Ireland has the right under the contract to charge what they like.
Bank of Ireland has the highest variable mortgage rate in Ireland – effectively forcing its customers to fix their rate if they wish to get any sort of value.
| Mortgage rate | Annual interest on €300k mortgage | Total repayments over 20 years |
Bank of Ireland SVR | 4.5% | €13,500 | €455,000 |
KBC SVR | 3% to 3.3% | €9,000 to €9,900 | €400,000 to €410,000 |
Additional cost of BoI | | €4,500 to €3,600 | €55,000 to €45,000 |
| | | |
| Bank of Ireland
All LTVs: same rate | KBC
Different rates for lower LTVs | Extra annual cost on a €300k mortgage |
1 year fixed | 2.9% | 2.5% | €1,200 |
2 year fixed | 2.9% | 2.3% | €1,800 |
3 year fixed | 3% | 2.25% -2.35% | €2,250 to €1,950 |
5 year fixed | 3% | 2.4% - 2.5% | €1,800 to €1,500 |
10 year fixed | 3.5% | 2.85% - 3.2% | €1,950 to €900 |
If Bank of Ireland’s rates are so high, why do they still have any customers?
Most borrowers are totally unaware of the mortgage rate they are paying. This is due to a combination of inertia and lack of financial knowledge.
Bank of Ireland attracts new customers with cash back incentives. This confuses customers. Without this incentive, Bank of Ireland would get no new business.
But the cash back allows BoI keep their rates high for existing customers.
If cash-backs were banned, then BoI would have to reduce their rates for all customers.
But when Bank of Ireland takes over KBC, can’t their customers switch to another lender?
They can. But most borrowers lack the financial knowledge to switch. They are confused by the offers out there and will usually make the wrong decision.
We have lost Ulster Bank and, now, KBC. What should the government be doing?
- They should ban cash backs
- They should make it easier for lenders to repossess homes where the borrower is paying nothing. Just like any other country in the World.
What would banning cash backs achieve?
Ulster Bank and KBC had the lowest mortgage rates. But they were losing business because customers were going to the banks who offered cash back – Bank of Ireland, permanent tsb and EBS.
Customers pay far more over the life of the mortgage, but many are attracted by the cash back which might allow them to furnish the house.
Banning cash backs would create a level playing people and force lenders to compete for new business based on mortgage rates.
In general, if a lender brings down rates for new business, existing customers can avail of them.
They should make repossession easier
Everyone agrees that people who get into mortgage difficulty but act responsibly should be protected.
But we have a large group of irresponsible borrowers who make no effort to repay their mortgage.
And the legal system makes it very difficult, very expensive and very time consuming to repossess a property.
The Central Bank rules require that the lender put aside huge amounts of capital for these non-performing loans.
The result is that the lender is forced to sell the non-performing loans at a big discount to vulture funds.