Should Askaboutmoney publish a Fair Mortgage Charter?

Brendan Burgess

Brendan Burgess

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Should Askaboutmoney.com publish a "Fair Mortgage Charter" for mortgage providers?

We would come up with a list of what we consider to be fair or basic requirements for a mortgage - see next post as an example.

Then we ask the banks to sign up to it.

Then we ask the Central Bank to impose it.

The downside would be that we would be giving a seal of approval to a lender who might be treating customers fairly, but who are still charging too much.

So, for example, EBS might qualify for the seal of approval but be more expensive than AIB, who might not qualify for it.

Brendan
 
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Here is my first stab at the criteria:


The bank would quote an SVR with a fixed discount or surcharge.

So let's say AIB charges an SVR of 3.5% for 80% LTV mortgages.
For 90% LTV mortgages they charge a surcharge of 0.5% i.e. 4%
For 50% LTV mortgages, they give a discount of 0.5% i.e. 3%

When they change their mortgage rates, they simply change the SVR for everyone - new and existing customers. If they have to reduce rates by 0.2% to remain competitive for new business, all customers get the rate cut.

They could still charge whatever SVR they like, but competition would make sure that they remain competitive.

The only people disadvantaged by this are the lenders who exploit existing customers - KBC and BoI. It actually favours AIB and Ulster Bank who effectively do this anyway. They don't lose business BoI and KBC on unfair terms.

All customers would be able to switch to new products with the same original LTV
Without this, a lender could keep their SVR high, and issue a new product with a bigger discount.

If a lender brings out a new product, existing borrowers on the same original LTV would be automatically entitled to it . Let's say I took out a <80% mortgage, if they bring out a new product with a higher discount, then I would be entitled to it.

This would probably have to exclude new customers incentives such as help with legal fees or 2% cash back.

No clawback on incentives for new customers

It might be better to ban these incentives. BoI can keep the rates high for existing customers, but attract new customers by offering a 2% cash back. But this ties the customer in for 5 years. I would have less problem with the 2% cash back if the borrower were free to switch to another lender without clawback.
 
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It doesn't solve the big problem of all banks overcharging
While it does not solve this problem, it would make pricing more transparent which is key to competition.

It doesn't solve the problem of banks closed to new lending
Danske could still charge 4.95% SVR and this does not deal with that issue.

The fact that it does not solve all problems, should not be a reason for not progressing with it.
 
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Hi Brendan,

I think this approach would at least bring some clarity to the situation. In the current scenario it is not clear what rate is applied or what increases or decreases affect KBC LTV variable rates for existing customers.

Our mortgage is currently with KBC but the variable rate we are on has not varied in the couple of years we have the mortgage. This is despite KBC advertising cuts to standard variable and LTV variable rates in both new and existing customer categories in that timeframe. The rate we are on is not advertised anywhere on the KBC website or their materials, their website only displays variable LTV rates for "New Customers" or standard variable rates for "Existing Customers".
KBCs LTV variable rates are only valid at time of draw down and the applicable rates are not advertised subsequently and do not decrease in line with changes to their "New" or "Existing" customer rates. Of course I'm sure when rates increase, these rates will increase so it's effectively an upward only variable rate.

There is no where that we can refer to see what our rate should be but if we knew that it was +/- 0.X% of the SVR and the SVR was advertised we would always be aware of what our rate should be and how any increases or decreases would affect us. This would certainly be clearer and simpler than the misleading approach employed by banks like KBC and BoI presently.
 
On health insurance, ALL available rates must be availble to ALL customers. Can something along those lines not be appllied? In that way, the gov is not setting rates, just setting the rules on rates and normal competition can continue.

Banks can still offer signing up inducements, but it would stop the likes of KBC hooking people in with a low fixed rate only to be followed by an extrotionate variable rate or follow on fixed rates
 
peemac said:
On health insurance, ALL available rates must be availble to ALL customers.
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Interesting comparison, but there are some significant differences:
  • Mortgages are risk rated; health insurance is not.
  • You can switch health insurers at will. It's not easy to switch mortgage providers.
 
Brendan Burgess said:
Immediately you draw down your mortgage. You are then an existing customer and ripe for fleecing.
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Once New Business customers draw down the mortgage KBC deem that mortgage ineligible for New Business OR Existing Customer rates cuts, so it can't really be considered Existing Customer mortgage either! It's some vague situation in between
 
I have changed the title of this thread and edited it.

The original one was should we try to get these criteria imposed.

I think we should consider trying to get voluntary compliance. If we can get some lenders to sign up to it, then we could ask the CB or the government to impose it.
 
Brendan Burgess said:
The downside would be that we would be giving a seal of approval to a lender who might be treating customers fairly, but who are still charging too much.

So, for example, EBS might qualify for the seal of approval but be more expensive than AIB, who might not qualify for it.
Click to expand...

Personally I would not worry about this aspect of it. The ultimate goal is for customers to have some level of confidence around their treatment as an existing customer and that new customers will not be favoured over them. The more product choices that exist, including cashback options, allows customers to choose the best product for them - even if others would not choose them personally
 
Brendan Burgess said:
It doesn't solve the big problem of all banks overcharging
While it does not solve this problem, it would make pricing more transparent which is key to competition.

It doesn't solve the problem of banks closed to new lending
Danske could still charge 4.95% SVR and this does not deal with that issue.

The fact that it does not solve all problems, should not be a reason for not progressing with it.
Click to expand...

Agree completely with the comments above. However i think we all have to realise there may not be a one solution fitting all available for this issue and a number of small victories may end up with a large one
 
My personal view on the policy would be focused initially on treating new and existing customers the same. A number of banks now appear to be engaging in subtle product differentiation without clearly spelling this out. This is moving them away from the straight forward SVR approach - further complicating the whole fair rates discussion. If banks engage in this practice, there needs to be a means of ensuring banks don't exploit customers accordingly:

1. Product should be clearly defined in the home loan agreement and what the product does etc. The original LTV should also be clearly stated in the homeloan agreement
2. All customers whether existing or new on this exact product should be treated the same, with the same rates applied to all
3. A customer should be free to move to any product they are eligible to, unless the product has been completely retired from sale. This means existing customers should be able to move to new products, so favours existing customers in theory. The bank will naturally favour new customers so it will balance out. This is in line with the health insurance comparison - which I think is important.
4. My personal view is that eligibility of product should be based on the original LTV you had when you SIGNED up for the original mortgage with that bank. If the LTV has changed, you should not automatically benefit from it. Same applies if the LTV increases. Otherwise I believe that the banks will start charging more for higher LTV mortgages. The bank may opt to have their own policy on this, but it also allows customers to switch if they can get a better rate on a lower LTV elsewhere.
5. After each defined period (say 5 years), banks have to write to each and every customer advising them of their current product & rate, and all other rates which they are eligible for based on original LTV - like what happens when you come off a fixed term. The default should obviously be to stay on the current rate but they should clearly advise if there are cheaper rates available or not. Going to a new rate should just be a matter of replying to the form by post.
6. Whether these rules would apply to customers in arrears I am not sure. I do think the arrears and non-active banks need to be solved differently.

The reason for point 3 is to stop banks just constantly create new products to avoid passing on cuts. That is why this point is key
 
Brendan Burgess said:
Interesting comparison, but there are some significant differences:
  • Mortgages are risk rated; health insurance is not.
  • You can switch health insurers at will. It's not easy to switch mortgage providers.
Click to expand...
I agree that the health insurance option is a good one - as it allows the companies to create as many products as they like, but they have to offer them to all customers even if they don't actively advertise them. There is also a single site (www.hia.ie) that allows you to 'easily' compare all products from all insurers.
If the banks want to engage in complex product differentiation, this is an area that will have to be addressed at some stage so why not now !

The big difference as I see with health insurance is the policy is renewed each year unlike a mortgage which is in effect never renewed. This is one of the reasons for the 5 year 'prompt ' and auto-renewal concept in the proposal above.
 
Brendan Burgess said:
No clawback on incentives for new customers

It might be better to ban these incentives. BoI can keep the rates high for existing customers, but attract new customers by offering a 2% cash back. But this ties the customer in for 5 years. I would have less problem with the 2% cash back if the borrower were free to switch to another lender without clawback.
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I think all that would happen here (with the exception of EBS) is the banks would change the payout of the incentive after a period of time (2 or 3 years) and therefore 'trap' the customer in other ways. The other option is to get agreement on a reducing balance clawback depending on when its broken - so within the first year 100%, second year 80% etc
 
Brendan Burgess said:
The bank would quote an SVR with a fixed discount or surcharge.

So let's say AIB charges an SVR of 3.5% for 80% LTV mortgages.
For 90% LTV mortgages they charge a surcharge of 0.5% i.e. 4%
For 50% LTV mortgages, they give a discount of 0.5% i.e. 3%

When they change their mortgage rates, they simply change the SVR for everyone - new and existing customers. If they have to reduce rates by 0.2% to remain competitive for new business, all customers get the rate cut.

They could still charge whatever SVR they like, but competition would make sure that they remain competitive.

The only people disadvantaged by this are the lenders who exploit existing customers - KBC and BoI. It actually favours AIB and Ulster Bank who effectively do this anyway. They don't lose business BoI and KBC on unfair terms.
Click to expand...

I don't think this will help anyone as instead of cutting the SVR rate, the banks would offer greater discounts to new customers. When price increases come, they would go on the SVR.

This only works if customers can change the product at will, and if that case it makes no difference whether the product is defined off SVR or not


The only way this would work is if the baseline SVR rate was universal across all banks (using whatever metric to calculate it) and the discount/surcharge offset was against this 'industry base rate'. This is something I would like to see happen at some stage, but more a medium term objective. This would allow longer term comparisons of different products available on the market not just now but into the future
 
Brendan Burgess said:
I think we should consider trying to get voluntary compliance. If we can get some lenders to sign up to it, then we could ask the CB or the government to impose it.
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Last comment on this for tonight - I think would be 'easy' to get certain banks to sign up to this, but a massive struggle for others.

The question I would have is - is any proposal being made completely in line with the existing guidelines and if not what is different. If it is, it will obviously be more difficult for banks to counter them - i.e. just providing clarity for existing rules.
 
Everything that has been said above makes perfect sense to me.

But I don't believe you can ever have a fair mortgage where one side of the agreement has complete control over the interest rate being charged.

For me at least a fair mortgage would have to either be fixed for the entire length of the mortgage or else track an independent rate.
 
todo said:
But I don't believe you can ever have a fair mortgage where one side of the agreement has complete control over the interest rate being charged.
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I guess its all about baby steps. I agree that its hard to have a fair mortgage when one side can change the rate as often as they like based on thin air.

However at the moment that is the harsh reality of variable rate mortgage lending in Ireland.

There are other issues going on as well, such as different treatment of new v existing customers and long duration clawback terms on certain offers.

The big question to me is whether action should be taken to try and not make the situation any worse due to recently introduced practices of banks and then try tackle the bigger issue around the rate and how they are calculated/changed.
With Brexit, I do think the government will reduce the 'pressure' on banks to reduce rates in the short term at least. The FF bill will help the trapped customers, but not sure about the others - assuming it goes ahead.
 
gnf_ireland said:
A number of banks now appear to be engaging in subtle product differentiation without clearly spelling this out. This is moving them away from the straight forward SVR approach - further complicating the whole fair rates discussion.
Click to expand...

That is why I am proposing that every lender would have to quote an SVR and could only change their SVR, but not the margin. Combine this with your suggestion that every customer has the right to switch to any other product based on LTV. This means that the lender could not leave the SVR high, but introduce a bigger discount for new customers. If they were to do this, existing customers could opt for the product.


gnf_ireland said:
5. After each defined period (say 5 years), banks have to write to each and every customer advising them of their current product & rate, and all other rates which they are eligible for based on original LTV - like what happens when you come off a fixed term. The default should obviously be to stay on the current rate but they should clearly advise if there are cheaper rates available or not.
Click to expand...

I like this idea. A Fair Mortgage Lender would have no problem with it.
 
The more I think of it, the more I believe that the incentives for new customers such as 2% cash back, should be excluded from any Fair Mortgage Product. If they are not banned, then existing customers should be able to avail of them as well.

Let's say that the best rate for an 80% LTV mortgage is 3.5% with an average of 3.7%. If Bank of Ireland charges 4%, then they won't get any new customers. But by offering 2% cash back, they will get new customers at this 4% rate. Thus they don't have to compete on mortgage rates. Existing customers get stuck paying 4%. Those who can switch probably won't bother, but we aren't too worried about them. But those who can't switch, who probably need the lower rate more than anyone else, are stuck.



Brendan
 
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