Oblige lenders to quote an SVR +/- margin?

Discussion in 'The Fair Mortgage Rates Campaign' started by Brendan Burgess, Feb 1, 2017.

  1. Brendan Burgess

    Brendan Burgess Founder

    People find it very difficult to compare mortgage deals which is probably the biggest disincentive to switch
    • Evaluating what is effectively a 20 year deal is inherently difficult
    • A lender might be good value today, but they might not pass on rate cuts
    • A lender has high rates, but gives 3% cash back.
    Would the following work?

    1) Lenders must quote an SVR for a standard product e.g. <90% LTV, <3.5 times LTI, clear ICB record.
    2) They can set a discount (or premium) on this when the mortgage is taken out
    3) They would be free to raise or reduce the SVR at any time, but must do so for all customers
    4) They could not reduce the discount for existing customers.
    5) They could change the discount for new customers
    6) No cash backs allowed other than the cost of switching - limited to €1,500

    • Would avoid the need to control mortgage rates.
    • Would greatly reduce discrimination against existing customers
    • Would make the market much more transparent
    • Would eliminate gimmicks and tricks
    • Would probably reduce the wasteful process of shopping around
    It wouldn't solve the following problems
    • Lenders who are closed to new business - their rates would still need to be controlled - probably based on the average SVR which would now be easily determined
    • Lenders could still charge what they want to people in Negative Equity.
    How it would work in practice for borrowers

    Johnny wants a 90% LTV mortgage. Comparing products would be a lot easier.

    Mary has a 50% LTV mortgage and finds that AIB is offering a 1% discount on their SVR of 4%. It's a little bit more complicated because KBC may offer a 0.5% discount on an SVR of 3.5%. But she knows that whichever one she goes with, they will have to reduce the rate for her if they reduce it for other customers.

    Paddy has been approved for an exception to the Central Bank rules - 95% LTV and 4 times LTI. He can be quoted a rate of SVR +0.5%.

    How it would work for lenders

    AIB wants to increase their market share. They have two options. They can reduce the SVR, but they reduce it for all customers.

    They want to target 50% LTV business, so they increase their discount.
  2. michaelm

    michaelm Frequent Poster

    Whatever the regime I think it should include some cap on rates (perhaps ECB + X) so that lenders who exit the market can't just hike their rates (like Danske did) and screw those not in a position to switch.
  3. Brendan Burgess

    Brendan Burgess Founder


    It would be great if it were possible to avoid a cap on mortgage rates. I don't think it will be possible, but that is why I am floating this for consideration.

    If the market average SVR is 3%, then the cap could be Average SVR +30%. Or it could be, as you suggest, a simple cap of ECB +4%.

  4. gnf_ireland

    gnf_ireland Frequent Poster

    @Brendan Burgess

    I have always liked this option as it allows customers to clearly see the benefits of lower LTV and Income brackets with various banks.

    However, the fact the bank is setting the SVR still means its next to impossible to do any sort of comparison across the various options. Your Mary example above is case and point - how does she pick between AIB and KBC? Its very very difficult.
    I would like this to go a step further, and benchmark the SVR on the floating average of outstanding mortgages (or new mortgages) issued by all banks in the previous 3 months. Make the central bank figures very relevant to everyone ! This way Mary could see AIB are offering 0.75% discount and KBC are offering 0.5% discount - means AIB will be 0.25% cheaper for the duration of the mortgage.

    This also puts responsibility back on the bank to think how they are setting rates, and downward pressure on rates will impact all customers. It also removes the issue of banks which leave the market.

    Whether, the factors should be realigned once every 5 years to take into account changes in LTI, LTV and clean credit reports is another matter. However, to avoid a repeat of the 'tracker issue' banks should have to clearly call out the calculation matrix in the home loan agreement, and this remains valid for the lifetime of the mortgage.

    SVR in this case is a common benchmark across all Irish banks

    Sadly, I don't see this type of scenario ever happening !
  5. Brendan Burgess

    Brendan Burgess Founder

    Let's see if I understand what you are proposing?

    The Central Bank works out the average mortgage rate for new 80% LTV business in the last quarter - say 3.5%.
    My mortgage with AIB would say Market Rate -0.25%. Your mortgage with KBC would say Market Rate.

    The market is very often irrational so, if this is what you are proposing, it couldn't work.

    At the moment, all the banks are charging about 1.5% more than the Eurozone rate, so it would not help them. (It could help protect someone with a dead bank.)

    Let's say that the fair SVR is 2%. But the banks become overly competitive and push the SVR down to 1%. This forces BoI to reduce their rates to 1%.

    If at all possible, I would prefer not to have to set rates or cap rates for active banks.

    My suggestion of allowing lenders set whatever SVR they choose, but oblige them to base all rates on this would facilitate competition.

    It doesn't solve all the problems.
    • AIB might be the cheapest today when I take out the mortgage, and they push their SVR up.
    • KBC might quote a low SVR but high premiums
    But it does solve a lot of problems
    • KBC's trick of discriminating between new and existing customers would not be allowed
    • Cash back would not be allowed, so they would be forced to compete on rates
    • There would be more transparency around pricing
    I think it would be worth trying out to see if it makes competition work to bring down rates and prevents the tricks and gimmicks lenders use to mislead borrowers.

    Unfortunately, in the end, I think it will be necessary to have some form of legislative control of mortgage rates. But I would try to make competition work first.

  6. Sarenco

    Sarenco Frequent Poster

    Hi Brendan

    Surely the obvious problem with this proposal is that there is nothing to stop a lender simply launching a parallel product with a different margin over their SVR based on some arbitrary criteria. That's what Ulster did last year.

    Alternatively, they could just artificially increase their SVR and apply deep discounts to this rate if they are trying to gain market share.

    I really don't think it's wise for the State to try and micro manage the mortgage market - or any market for that matter. The fact that lenders are differentiating their mortgage products is something that should be welcomed - not frustrated.

    I agree that we should have a relative statutory cap to prevent usurious lending but beyond that the State shouldn't interfere with the market beyond doing everything possible to facilitate competition.
  7. Brendan Burgess

    Brendan Burgess Founder

    Hi Sarenco

    First of all, I think that the lenders should be encouraged to make products transparent and comparable and to treat customers fairly and this would be one way of doing it. Ideally it would be a voluntary code and if it brought down interest rates, then the bill to control interest rates might not be needed.

    Your weakness would be easily controlled for. Lenders must offer existing customers any deal on offer to new customers. If a lender wants to give a discount off the SVR for large mortgages, they would have to offer them to existing customers as well. They would not be allowed to set a lower rate for an arbitrary criterion which was not related to cost.

    To the best of my knowledge, any existing UB customer can apply for any product on offer to new customers? Is that not the case?

    This is a theoretical argument and product differentiation beyond a certain point is bad for consumers. Look at health insurance to prove the point.

    Mortgages should be a simple product and lenders should not be allowed to introduced gimmicks which complicate it and make it even more difficult for consumers to compare.

  8. Sarenco

    Sarenco Frequent Poster


    We don't prevent any other commercial enterprise from offering incentives to attract new customers so why should mortgage providers be treated as a special case?

    Existing borrowers should be encouraged (and facilitated to the greatest extent possible) to refinance their loans to avail of the very best deals on offer at any given point in time. We shouldn't be trying to reward customer inertia if we want to encourage competition between providers.

    They can indeed.

    Similarly, existing KBC customers can apply for a rate applicable to a lower LTV bracket during the term of their loan. Conversely, AIB borrowers cannot move to a lower LTV bracket during the life of the mortgage.

    Well, I don't agree that product differentiation in the health insurance market has been bad for customers.

    I do, however, think that community rating and, particularly, lifetime community rating are bad for consumers as a whole and that has driven the rather extreme product differentiation that we can see in the health insurance market.

    Are consumers really finding it difficult to compare different mortgage products currently on the market? I really don't think that they are and I would hate to see the introduction of the sort of "big brother" interventions that you advocate.

    In my humble opinion, the free market, and not the State, should decide in all circumstances what lawful products or services succeed or fail. I appreciate that you disagree with this basic principle.
  9. Brendan Burgess

    Brendan Burgess Founder

  10. Brendan Burgess

    Brendan Burgess Founder

    You are confusing two separate issues here. Product differentiation and customer discrimination. OK, allow product differentiation as long as they offer the new differentiated products to existing customers.

    But we want competition on mortgage rates to bring down the rates to new levels. Differentiation is fine so long as it's not designed to make comparisons difficult.

  11. Sarenco

    Sarenco Frequent Poster

    I don't think I am confusing anything. Unless you prevent lenders from underwriting loans then lenders will (and should) always differentiate between customers.

    If a lender treats existing customers badly and those customers can get a better deal elsewhere then that lender will lose business. That's how competition works.
  12. gnf_ireland

    gnf_ireland Frequent Poster

    Yes this is exactly what I am proposing. While it may not result in mortgages rates being lower immediately, it does support a number of things
    (a) it protects those who cannot switch - for whatever reason. If interest rates are falling generally, they will be allowed to available of the benefit. My view has always been that these customers are the ones who require the most legal protection
    (b) it allows customers to compare banks and rates not only for the short term but also the long term. In your example above, AIB will always be cheaper than KBC - today, tomorrow and in 10 years time. We have seen this feedback on AAM in the past where people moved and the bank upped the rates immediately and are slow to do it again. This would remove this as a reason for not switching
    (c) those who are in a position to switch can clearly see how much they would save by doing so. If I am on a Market Rate product, and a product exists that I can avail of for Market Rate - 0.65%, I know exactly what I can save. It is simple maths - which some people appear to struggle with

    If I know I am guaranteed to save 0.65% on my mortgage over its lifetime, I should be also more willing to potentially pay an arrangement fee. This should have the opposite effect to the cashback and bring rates down further.

    As you know, I have always struggled with 'protecting' people who are in a position to switch but simply do not do so. There is an element of personal responsibility here on the biggest financial commitment of your life.

    This is key - I don't think its a one size fits all scenario. Competition has to be the answer for those who can switch, and maybe making switching easier.
    For those who cannot switch, they will need protection of some sort. Allowing them to move with industry trends is a good start in my view, rather than a cap.

    Problem here is everyone has a different view, and most arguments are reasonable if this was a functioning market. Sadly I don't think it is, and give current house prices I see a big issue for people when interest rates behind to rise !
  13. Brendan Burgess

    Brendan Burgess Founder

    But GNF, that just couldn't work.

    Say Bank of Ireland is charging 4% today, which is artificially high to force people to fix.
    AIB is charging 3.5% for the same mortgage which is probably around 1% higher that it should be.

    A new BoI guy comes in and decides to go for market share. He reduces the the rate from 4% to 1.8%. A bit lower than where it should be but he wants to buy market share.

    AIB then has to cut the rates to 1.3% and would go out of business.

    I agree that there is a problem in that we can't forecast which lender will be cheaper in the long term. AIB is best value today - BoI is worst. They could change places. But I don't see any way around this. Lenders must set their own rates, possibly subject to a cap, but they can't have their rates determined by the market, which is often irrational.

  14. gnf_ireland

    gnf_ireland Frequent Poster

    AIB might go out of business anyway if it competes at that level. Is this not what got us into the whole mess in the first place.

    Lets say instead Market Rate was 3.5%. Instead of offering 1.8%, BoI offered Market Rate -1.2%. AIB counter it with a Market Rate -1.5%. Market Rate falls the next quarter to 3%.
    Any customer able to move would look to move to these new attractive offers.
    BoI customer now on interest rate of 1.8%; AIB on 1.5%.

    BUT Joe Bloggs, who cannot switch and has a Market Rate mortgage with PSTB also sees benefit and his mortgage rate drops from 3.5% to 3%

    In this case, the lenders are setting the rates - in that their offsets, whether positive or negative, is their choice.
    Lets take commercial loans, which are often based on EURIBOR or other external rates. The only difference is this is based on the floating average of interest rates for homeloan applications rather than some irrelevant value such as ECB rate.

    If this is totally unworkable (and not sure it is), then maybe banks should be asked to set rates based on their cost of funds. Again, I understand this can be common in commercial loans, so why not use it in homeloans? The idea is that we should try and tie the underlying basis with something that moves with the market, and therefore allow some level of 'future prediction' of rates relative to the market. I assume in normal times, the cost of funds of each bank goes in the same direction. and one would hope over the life type of the mortgage there would be more normal than irrational behaviour !

    My utopia is for someone to be able to be able to compare mortgage offers today, and with a reasonable level of certainty be able to compare over a 5 year period (without fixing). If the market fundamentally changes in this window its a different discussion obviously
    I guess I am asking too much !