My Examiner article: "What the Minister for Finance must do to help mortgage holders"

Brendan, you and Michael McGrath have one thing in common, you both demonstrate a complete lack of understanding in how financial products are constructed and sold to the public. Just like you can't buy a generic car, you can legislate a generic mortgage. No doubt it sounds great to the general public, but for a banker or an institutional investor in a bank it is just one more reason to keep the hell out of the Irish market.
 
I disagree Jim2007, it is because bankers like to “construct” mortgage products for one of the most significant purchases a member of the public is likely to undertake in their lifetime that it needs to be severely regulated. It should be so straightforward that kids in junior cert can be taught all the nuances of a mortgage and be prepared to undertake one fully informed.

Simple repayment mortgages, with no frills should be on offer to all mortgage holders from all institutions. The differentiation should be in the customer service by the bank to the client.

I am arguing for a ban on cashback mortgages and for banning discrimination between new and existing customers: Force the lenders to compete on mortgage rates and mortgage rates alone.

There are so many bad practices stamped out over the last 20 to 30 years, it should not be the role of the bankers to come up with even more complex and bizarre or “unique” or “appealing” types of products. I recall friends who could not make extra payments to pay off their mortgage earlier, people who paid of lump sums but discovered they were not applied to their mortgage until year end, mortgages that did not calculate interest daily, overcharging fees on mortgages in arrears etc etc.
 
Jim2007 said:
Just like you can't buy a generic car, you can legislate a generic mortgage.
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Hi Jim

You want to drive an automatic top of the range car with a brand name because you like driving and do a lot of it and often have family members in it. It's great that you have a choice of lots of different cars, brands, fuel systems, colours etc.

I drive 5,000 km a year and am happy with a reliable small car. Even then, I have a choice of colours, models , etc.

But money is fungible.
The €200,000 I borrow from Bank of Ireland is exactly the same €200,000 I borrow from AIB

The only difference is the price. The banks will complicate this as much as possible to confuse me and charge me a higher price.

We tell lenders
If you provide a product to new customers, you must provide the same product to existing customers who meet those criteria.
You cannot offer cash back as an inducement.

Most of our lenders operate like that anyway. Most mortgage lenders operate on that basis in other countries.

So I doubt it would put off any overseas lenders or investors.

In fact, I think it would encourage them. Because at the moment the fair lenders are losing market share to the likes of Bank of Ireland and ptsb who dazzle customers with cash back.

We have very strict regulation of car manufacturing. Safety standards, emission standards, etc. But that has not stopped companies entering the market.

Brendan
 
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I don't know what the fuss is about. Interest rates moved up from an historic low towards their normal average. The Celtic Tiger was booming at 4.5%, unfortunately as Bertie would say 'it got boomier'.

If the government really wanted competition in mortgage market, they would make it easier for banks to repossess property.

In saying that, I am all for removing cash back and other gimmicks. Unfortunately, not everyone has basic financial sense. People need to be protected from them selves. Just because a bank is pushing money at you does not mean you should take it.
I hate seeing people in trouble with huge levels of credit card debt or after buying a fancy car, when all they need is a 5k runaround like Brendan. They live the good life for a few years, but it is often un sustainable.

Edit to correct spelling.
 
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Towger said:
In saying that, I am all for removing cash back and other gimmicks. Unfortunately, not everyone has basic financial sense. People need to be protected from them selves.
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I agree completely. There is plenty of research that shows that people often make the wrong financial choice when there are two numbers to consider – in this case the interest rate and the cashback.
 
Paul F said:
two numbers to consider – in this case the interest rate and the cashback.
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The 3rd number is the monthly repayment. It is basic maths to workout the bank will recoup their cashback in an few years, while most people with not switch and end up paying extra for the life of the mortgage.

People do not realize how much a small percentage differences add up.
 
But Jim2007 raises an important issue.

Would consumer protection measures like these deter a new entrant?

I think it would encourage fair lenders as they would not have to compete with the unfair practices of cash-back.

The difficulty and cost of repossessing is a much bigger deterrent and results in good new lenders like Avant being ultra-cautious.

Brendan
 
Jim2007 said:
Brendan, you and Michael McGrath have one thing in common, you both demonstrate a complete lack of understanding in how financial products are constructed and sold to the public. Just like you can't buy a generic car, you can legislate a generic mortgage. No doubt it sounds great to the general public, but for a banker or an institutional investor in a bank it is just one more reason to keep the hell out of the Irish market.
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Can you be more specific in your critique maybe?
E.g. what specific suggestions by Brendan do you see as flawed, and why?
I don't really understand the point about "generic mortgages".
 
Brendan Burgess said:
But money is fungible.
The €200,000 I borrow from Bank of Ireland is exactly the same €200,000 I borrow from AIB
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So is petrol or electric current or table salt.

It makes little sense to advocate for restrictions on product differentiation in mortgages but not for any other number of other consumer products.

Otherwise I fully agree captive borrowers whose mortgages are held by funds should be protected from punitive rates. I think your advocacy on this is really commendable. But this is a totally separate issue.
 
I don't like the idea of banning cashback. For those with an understanding of how mortgage loans work it can be a worthwhile exercise.

We should look to inform people. There is no incentive to better ones understanding of financial products if you're constantly mothered. I think we can give people better summary info and let them make their own choices.

It's been a few years but when on holiday in Australia I was impressed that all adverts for phone contracts, cable TV etc. All showed the total cost over the full term of the contract. Despite different bonuses and into offers I could quickly compare similar products.

I appreciate the likes of aprc is full of assumptions but if lenders were required to show total (expected) interest expense (as a percentage of initial loan) beside cashback it allow people to see that the 2% might be a better use.

Would you pick:
  • 2.9% fixed for 30 years. No cashback
  • 3.1% fixed for 30 years. With 2% cashback.

I wouldn't have a clue to be honest but if I was told to pick a between the following:

  • 2.9% fixed for 30 years. No cashback and a total expected repayment of 150% of the original loan.
  • 3.1% fixed for 30 years. With 2% cashback and a total repayment of 154%
I can now see the 2% is expected to cost me 4% and now it's up to me to decide if it's worth it.
 
NoRegretsCoyote said:
It makes little sense to advocate for restrictions on product differentiation in mortgages but not for any other number of other consumer products.
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Hi Coyote

I am doing a briefing note on the issue for the Central Bank. Here is a sneak preview of an extract from it. But don't tell anyone as I have not sent it in yet.

But isn’t it standard practice in other sectors to give new customers discounts, so why should it be any different for mortgage lending?

First of all, the fact that some service providers offer new customer discounts does not mean that it’s a fair practice. I would argue that it should be banned in all industries and not just in the mortgage market.

But, in any event, the mortgage market is very different from signing up to, say, an insurance product.

  • Insurance is a one year product whereas a mortgage is typically a 20 year product.
  • Insurance premia are far simpler to understand and compare. If one insurer charges me €500 and another charges me €600, I can see the difference immediately and decide if any additional cover is worth the extra €100. With a mortgage product, I have to make many decisions.
    • Fixed or variable
    • How long to borrow for
  • Borrowers will tend to focus on the repayment because it’s easier to understand cash than percentages.
  • The mortgage payment is a far higher proportion of a person’s income than their insurance premia.
  • I can switch insurers easily – I can go onto bonkers.ie or some other website and switch instantly to another insurer. Switching mortgage provider can take about 3 months, during which time, prices may well have changed.
  • There is no cost to switching insurance where switching mortgage provider costs around €1,500.
  • Many borrowers cannot switch lender as they have a restructured mortgage or their personal circumstances have changed since they drew down the mortgage so they are prisoners of their lender. While the claims history of some drivers might make their premium higher, they are rarely stuck with no choice.
 
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skrooge said:
  • 2.9% fixed for 30 years. No cashback and a total expected repayment of 150% of the original loan.
  • 3.1% fixed for 30 years. With 2% cashback and a total repayment of 154%
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I like this idea but I would use actual monetary figures, e.g., €450k vs €462k. Percentages are really abstract for most people.

I would still prefer to ban cashback. When some people hear "9 grand!!!" they stop comparing.

If we (AAM or the regulator/CCPC) used the "total cost" approach, I would use something other than APRC (because APRC depends heavily on variable rates, which are weird in Ireland, and currently almost meaningless for Avant).

I favour estimating the interest rate difference between given lenders over the last several years and using this difference as the basis for projections. And you would be forbidden from using "new customers only" rates for this purpose.

E.g., if an analysis showed that AIB's 5-year fixed rate had averaged 2.6% over the last 5 years, while BOI's 5-year fixed rate had averaged 3.1% over the same period, you would maintain this 0.5% difference in all projections.

You would still be free to use whatever average "base rate" you want to assume for the future but you would respect the estimated rate differences between lenders. E.g., you could assume a 4% future AIB rate and a 4.5% BOI rate.
 
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skrooge said:
I don't like the idea of banning cashback. For those with an understanding of how mortgage loans work it can be a worthwhile exercise.
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Hi skrooge

Another confidential extract from my submission to the Central Bank

Why is cash back not in the interests of consumers as a whole?
(For a fuller discussion see the Appendix)

In any discussion I have had with Central Bank staff about cash back, they focussed on the ideology that choice and product innovation are good for consumers. Again, this is a purely ideological position divorced from the real world of Irish mortgage lending. They argued that cash back suited some customers who were free to avail of this or go to another lender for a cheaper non cash-back deal. (This is also the ill-informed view of the CCPC.)

But that is the wrong way to look at it. Step back and take a wider view. Why did Bank of Ireland introduce cash back? It was not some magnanimous gesture to give customers choice. It was so that they could maintain artificially high rates for their back book of existing customers.

If Bank of Ireland charged new customers 3% when AIB was charging 2.5%, then Bank of Ireland would get no customers. So, they would have to reduce their rates to 2.5%. They did not want to reduce the rate to 2.5% to compete with AIB because they would come under pressure to offer this rate to existing customers. So giving cash back enabled them to charge higher rates to new customers, but more importantly, it allowed them to keep the rates higher for existing customers.

If the Central Bank or the government were to ban cash backs as “not being in the best interests of the consumer” or “not treating customers fairly” , then Bank of Ireland and permanent tsb would need to reduce their rates to compete with other lenders for new business.
 
@Brendan Burgess Would you consider adding another point about cashback to your submission? Namely, that some borrowers, especially first-time buyers, use it as a way to get around the Central Bank's "90% maximum LTV" rule? They unofficially borrow €6,000 from a relative, combine it with a deposit of €27k and a mortgage of €300k, and buy a house for ~€333k. They then use the cashback to pay back their relative. They have effectively borrowed with a 92% LTV.

So cashback (which at least some people in the Central Bank like) is facilitating some borrowers to break the Central Bank's own LTV rules.
 
First of all, I think that cash back should be banned. Providing more information that someone will pay a lot more over the next 20 years, does not fix the problem. Most people can't evaluate the information. And cash back is not about individual decisions. It's a device to keep the rates for the existing customer high.


Paul F said:
I favour estimating the interest rate difference between given lenders over the last several years and using this difference as the basis for projections. And you would be forbidden from using "new customers only" rates for this purpose.
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If I understand this correctly...

While I see the merit in it, it would be way too complex for an individual projection. And brokers and bankers would just say "Oh yes, BoI were dearer but they have changed their strategy. What matters is the rate you are fixing at today... "

But maybe Askaboutmoney could compile a table of the historic rates for a standard product e.g. <90% , 5 year fixed €200k mortgage.

But then someone taking out a big mortgage or a green mortgage could be misled by that.

Brendan
 
Paul F said:
I like this idea but I would use actual monetary figures, e.g., €450k vs €462k. Percentages are really abstract for most people.

I would still prefer to ban cashback. When some people hear "9 grand!!!" they stop comparing.

If we (AAM or the regulator/CCPC) used the "total cost" approach, I would use something other than APRC (because APRC depends heavily on variable rates, which are weird in Ireland, and currently almost meaningless for Avant).

I favour estimating the interest rate difference between given lenders over the last several years and using this difference as the basis for projections. And you would be forbidden from using "new customers only" rates for this purpose.

E.g., if an analysis showed that AIB's 5-year fixed rate had averaged 2.6% over the last 5 years, while BOI's 5-year fixed rate had averaged 3.1% over the same period, you would maintain this 0.5% difference in all projections.

You would still be free to use whatever average "base rate" you want to assume for the future but you would respect the estimated rate differences between lenders. E.g., you could assume a 4% future AIB rate and a 4.5% BOI rate.
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All valid and ultimately the € amount is probably easier. The aprc versus base rate would be tricky. You'd want to avoid lenders gaming the system. Plus it should reflect the best guess of what the customer will face.

The main point is that with the inclusion of an extra number you can go a long way of presenting the true cost of cash back. I pulled my suggestion together in a couple of minutes I'm sure it could be refined significantly.
 
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Brendan Burgess said:
Hi skrooge

Another confidential extract from my submission to the Central Bank

Why is cash back not in the interests of consumers as a whole?
(For a fuller discussion see the Appendix)

In any discussion I have had with Central Bank staff about cash back, they focussed on the ideology that choice and product innovation are good for consumers. Again, this is a purely ideological position divorced from the real world of Irish mortgage lending. They argued that cash back suited some customers who were free to avail of this or go to another lender for a cheaper non cash-back deal. (This is also the ill-informed view of the CCPC.)

But that is the wrong way to look at it. Step back and take a wider view. Why did Bank of Ireland introduce cash back? It was not some magnanimous gesture to give customers choice. It was so that they could maintain artificially high rates for their back book of existing customers.

If Bank of Ireland charged new customers 3% when AIB was charging 2.5%, then Bank of Ireland would get no customers. So, they would have to reduce their rates to 2.5%. They did not want to reduce the rate to 2.5% to compete with AIB because they would come under pressure to offer this rate to existing customers. So giving cash back enabled them to charge higher rates to new customers, but more importantly, it allowed them to keep the rates higher for existing customers.

If the Central Bank or the government were to ban cash backs as “not being in the best interests of the consumer” or “not treating customers fairly” , then Bank of Ireland and permanent tsb would need to reduce their rates to compete with other lenders for new business.
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I partly agree - can the consumer do better yes but unfortunately cashback is just a point in a broad spectrum of approaches bank use to fleece customers.

Ban cashback and they may well start competing on rates but it might not be any better. They might all target low six month- one year fixed rates. In effect offering discount rates before the mortgage holder is faced with high renewal rates/variable rates. It's the same idea play off borrowers short term outlook. It's hard to close all the loop holes. The danger is it becomes over regulated.

Whereas improving the information the customer has to compare the total cost feels like a stronger approach.
 
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