Should banks be allowed to raise their Standard Variable Rates without limit?

Brendan Burgess

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This issue has been discussed in different threads on askaboutmoney and on various TV and radio programmes. Borrowers say one thing while the banks say something else. I thought it would be useful to collect the information and arguments in one systematic thread and see if there is a way forward.

Statement of interest: I have a direct shareholding in Bank of Ireland and an indirect shareholding as a taxpayer in AIB, PTSB and EBS. I have a cheap tracker.

|rate 7/2009|increase|rate Sept 2011|
ECB|1% |0.5%|1.5%|
PTSB|2.69%|3%|5.69%| not available to new borrowers
EBS|2.65%|2.28%|4.93%|from Oct
Bank of Ireland|2.6%|1.25%|3.85%|
AIB|2.65%|0.84%|3.49%|
This information was provided by Will Goodbody on yesterday's 6 One News on RTE 1

Can anyone confirm if these rates are correct?
Has anyone got the rates for the other banks?

From the banks' point of view
The banks are paying very high rates for deposits and the mortgage rates must reflect this.
The banks need to make a profit to survive - these are just market rates
The margins in the Irish mortgage market were unsustainably low. Bank of Scotland cut the mortgage rate and Northern Rock raised the deposit rate so that the banks could not make a profit on the margin. Things are only now returning to normal.
No one complained when the Irish banks reduced their Standard Variable Rates although the ECB had not reduced them.
They have been told to deleverage by the Central Bank and this is one way of doing it. Customers now have an incentive to repay their loans.
They charge the save SVR for new business and for existing business, so they are not exploiting existing customers to attract new business. (Irish Nationwide used to do this)
These are not tracker mortgages so the borrower has no right to track the ECB rate.
Most of these borrowers could have switched to trackers but didn't get their act together.


From the taxpayers' point of view
The taxpayers' point of view is effectively the same as the banks' point of view as we own 50% of all mortgages. However, we can't direct the non state-owned banks to moderate the interest rate.
We badly need to see the banks deleveraged to reduce our exposure.
We badly need to see the banks profitable again so we can recover some of the money we have used to recapitalise them.
These high rates for new borrowers are reducing mortgage demand.

From the borrowers' point of view
These banks have been baled out by the taxpayer and are owned by the taxpayer and now they are screwiing those same taxpayers
Although they are not trackers, there is a reasonable expectation that they would stay within range of the ECB rates
What is to stop PTSB from raising the rate to 10%?
This is just making the arrears problem worse for those in arrears
There is no competition in the market so we can't switch to a more competitive lender
The state owned banks should charge the same rates.

False arguments (not saying that I agree with the above points)
"Borrowers with SVRs are subsidising those with trackers."
Not really. Each product has to be profitable in its own right. It's easy to compare SVRs with trackers, but you could also argue that the SVRs are subsidising the losses on SVRs and the losses on property development.

"
EU data show that we have cheap mortgage rates by comparison to others in the Eurozone." Irish Bankers Federation claim
This may be factually correct, but is not the point. The averages are being brought down by the 50% of borrowers who have cheap trackers.

Some suggestions
The state owned banks could giver borrowers the option to convert all SVR mortgages to trackers e.g. ECB + 4.5%. This removes the borrower from being subject to the whim of the lender.
The Central Bank should extend the deleveraging timescale, in particular, on PTSB.


 

bugler

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356
How exactly can you leave it to a lender to decide the rate of interest to be paid on a loan unhindered by any agreement or even common-sense? Would that even be legal? Surely there is a point where a contract is so one-sided that it is deemed 'unfair' and non-binding.

Allowing a lender to adjust variable rates as they please is just not workable, and is a great idea if you want to kill off what little remains of a mortgage market.

I have always found the variable concept quite strange.
 

thedaras

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813
With almost everything we purchase ,we can choose to change the supplier should their rates become too high, however this is next to impossible for most people with mortgages.

So in effect those with the very high PTSB rates are very much tied to them,and have to pay whatever rates they choose to charge..Which I think is very unfair based on the above scenario..

If those mortgagors could switch,they would.
 

Protocol

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2,872
I have collected some data in an Excel file. I can't promise it's 100% correct.

AIB
Lowest SVR, 2009 = 2.25
End 2009 = 2.25
During 2010 +0.50 +0.50 = 3.25
During 2011

Now = still 3.25?

BoI
Lowest SVR, 2009 = 2.60?
End 2009 = 2.60
During 2010 +0.50 = 3.04 / 3.10 APR, + 0.45 = 3.49
During 2011 + 0.50 = 3.99

Now = 3.99?


EBS
Lowest SVR, 2009 = 2.63
End 2009 = 2.63
During 2010 +0.60 + 0.60 = 3.83
During 2011 +0.60 + 0.25 = 4.68

Four increases of 2.05 in total, now = 4.68??


INBS
Lowest SVR, 2009 = ??
End 2009 = 2.74
During 2010 ??
During 2011 ??

Now = 4.4??


pTSB
Lowest SVR, 2009 = 2.69

Only bank to increase SVR during 2009??
End 2009 = 3.19
During 2010 +0.50 +0.50 = 4.19
During 2011 +1.00 = 5.19

Four increases of 2.50, now = 5.19??
 

Brendan Burgess

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Surely there is a point where a contract is so one-sided that it is deemed 'unfair' and non-binding.
That is a very interesting point.

I campaigned for years against Irish Nationwide's practice in this area. They did not have standard variable rates.

The rate quoted to new customers was competitive - it had to be or they would not get any new business.

But rate cuts were not passed on to existing customers.

The legal advice I was given at the time was that such increases or decreases would have to be reasonable. A strict interpetation of the law would suggest that they could charge 100% per year, but the court would not uphold that. However if PTSB has increased the rate by 2.5 percentage points more than the ECB rate, is that unreasonable?
 

raven

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I think there should be some framework for increasing rates; something like there is in place with the energy regulator (though that has limited success by the looks of it) where the banks need to get approval before increasing variable rates.

It is perfectly legal in theory that the Bank can turn around in the morning and decide to charge say 80% interest and you have jump for them. Basically they say how high, and we need to jump for them.
As regards to legal challenges to this, - I've never heard of a court subjectively saying a bank's rates are too high.

This is insane, and ordinarily no-one would ever sign up to a crazy one-sided contract like this. But, - the banks can do this because, well, ....they're banks.
 

Mpsox

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They should be linked to the ECB rate with a maximum % above the ECB rate which they cannot exceed. Within that confinement, they could offer whatever type of mortgage they want to.

Subprome lenders charge huge rates because of the risk involved, but if the person is that much of a risk, they should not be given a mortgage in the first place. Banking should be prudent
 

NorfBank

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Hi dara

I thought that the figure quoted by Will was a bit high. I will verify the current rates and edit the original post.

brendan
PTSB Standard Variable Rate (no longer available) is 5.69%.
Their LTV variable rate is 6.05% <80% LTV, 6.15% > 80% LTV
 

NorfBank

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]
Subprome lenders charge huge rates because of the risk involved, but if the person is that much of a risk, they should not be given a mortgage in the first place. Banking should be prudent
PTSB would almost be a lender of last resort these days, their lending policy is nowhere near as strict as AIB for example therefore there is a higher risk of default being priced into their rates. (or at least that's the way I see it).

If you are trying to get a mortgage and PTSB are the only ones that will approve you then maybe you should wait a while for your financial situation to improve and then try one of the other lenders.

I know this does not help those who took out a mortgage before the crisis began, you are being punished for PTSB's imprudent lending in the past. Then again if you took out a mortgage before the crisis began then maybe you turned down the chance of a freely available tracker?
 

marksa

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They should be linked to the ECB rate with a maximum % above the ECB rate which they cannot exceed. Within that confinement, they could offer whatever type of mortgage they want to.
so how will they fund the mortgage? they will only get approx 70% funding from ECB and the remainder from elsewhere. Also, from Regulatory liquidity point of view a portion of their funding has to be from other sources such as term funding with a maturity greater than 1 year, a portion with maturity greater than 2 year etc. - all of which comes at a far higher cost than ECB.

At the end of the day, competition should set the prices, and dictate as to how high a price can be. the real problem was the ridiculous level of competion in the early 00's which drove bank margins to below the expected loss levels of 0.50%, so they were never going to be able to build up enough capital reserves to protect against economic downturns. The regulator should have stepped in and made them move to more sustainable models of business.
 

Brendan Burgess

Founder
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37,479
PTSB Standard Variable Rate (no longer available) is 5.69%.
Their LTV variable rate is 6.05% <80% LTV, 6.15% > 80% LTV
Hi Norfbank

So the 5.69% figure is the right figure for comparison purposes?

And 2.69% is the best starting figure?

Brendan
 

marksa

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362
Some suggestions
The state owned banks could giver borrowers the option to convert all SVR mortgages to trackers e.g. ECB + 4.5%. This removes the borrower from being subject to the whim of the lender.
The Central Bank should extend the deleveraging timescale, in particular, on PTSB.
Not a bad compromise - at least it gets away from the usury argument. But then the bank will have to manage the optionality risk - the bank is selling an ECB Cap option. ECB is impossible to hedge - there is no source for ECB funding other than ECB repo itself, and even then while the ECB offers fixed price tenders at the minimum bid rate of e.g. 1.50%. In normal market conditions the Repo is a variable tender and closely tracks, but no equal to the minimum bid rate. So in a variable tender the repo may be at e.g. 1.53%
 

marksa

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362
NIB SVR was 3.40% in July 2009 and is still 3.40%, and has been the same since March 2009, per last notice on my account that I can find. So they have not increased rates, but did not decrease as much as state-owned banks did in early 2009. I seem to recall reading somewhere that they don't fund their mortgages the same way as local banks and don't track ECB for variable rates. Guess its because it is a non-Euro parent.
 
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