Brendan Burgess
Founder
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The Governor has given the Oireachtas Finance Committee new figures on the true mortgage rate for new business.
It's 4.51% not the 3.47% their statistical series say
[broken link removed]
The reduction of two further steps in the ECB’s main policy interest rate has had a complicated influence on financing conditions in Ireland.
...
On balance the positives for Ireland clearly outweigh the negatives, not least to the extent that the ECB’s expansionary policy will help boost economic demand in the euro area as a whole in the course of bringing inflation back to its target.
...
Irish borrowers on tracker mortgages have seen this further interest rate reduction fully passed on to them, continuing and reinforcing an exceptionally lengthy period of ultra-low interest rates that has helped those borrowers.
...
Because of the impact on trackers, though, the lower ECB interest rates have not directly improved the banks’ profitability, because the average and marginal cost of bank funds does not fall as much. The banks’ drive to restore their profitability, combined with the lack of sufficient new competition, has meant that, far from lowering their standard variable rates over the past three years as ECB rates have fallen, they have (as is well known) actually increased the standard variable rates somewhat. The trends are shown in the attached figure which is based on a simple bank-by-bank average of the advertised standard variable rates for an 80 per cent loan-to-value mortgage. (Since this trend is not evident from the traditional interest rate series published by the Central Bank in line with international standards, we have been working on the assembly on a rigorous basis of additional statistical series on mortgage interest rates, and expect to publish these as from data for January 2015.) These rates indicate that standard variable rate borrowers are still paying less than they were before the crisis, but not by much. A widening of mortgage interest rate spreads over policy rates also occurred in the UK and in many euro area countries after the crisis, but spreads have begun to narrow in the UK and elsewhere. Until very recently bank competition has been too weak in Ireland to result in any substantial inroads on rates.
...
What is the role of the Central Bank in the area of mortgage interest rates? From the prudential point of view, we could have a role in seeking to ensure that banks set rates on new business sufficiently high to cover the risks of future default. While the current spreads would not have been sufficient to compensate the banks for the risks they actually took in the boom, much of which still embedded in the existing stock of mortgages, I think it would be hard to argue that mortgage underwriting today was so bad as to require such a high margin on new business. Inevitably, though, constrained by their inability to restore spreads on trackers, the banks have sought all means to restore their profitability including the widening of standard variable rate spreads, which typically apply to old as well as new business.
...
As in most advanced economies, in Ireland it has long been understood that tight administrative control over the rates charged by banks would be counterproductive in ensuring a sufficient flow of properly priced credit on a lasting basis. For one thing, such control would strongly discourage new entrants. Therefore, while interest rate spreads are now high, since national credit policy is crafted with the welfare of the people as a whole being the “constant and predominant aim”, I see no sufficient basis for altering this view.
It's 4.51% not the 3.47% their statistical series say
[broken link removed]
The reduction of two further steps in the ECB’s main policy interest rate has had a complicated influence on financing conditions in Ireland.
...
On balance the positives for Ireland clearly outweigh the negatives, not least to the extent that the ECB’s expansionary policy will help boost economic demand in the euro area as a whole in the course of bringing inflation back to its target.
...
Irish borrowers on tracker mortgages have seen this further interest rate reduction fully passed on to them, continuing and reinforcing an exceptionally lengthy period of ultra-low interest rates that has helped those borrowers.
...
Because of the impact on trackers, though, the lower ECB interest rates have not directly improved the banks’ profitability, because the average and marginal cost of bank funds does not fall as much. The banks’ drive to restore their profitability, combined with the lack of sufficient new competition, has meant that, far from lowering their standard variable rates over the past three years as ECB rates have fallen, they have (as is well known) actually increased the standard variable rates somewhat. The trends are shown in the attached figure which is based on a simple bank-by-bank average of the advertised standard variable rates for an 80 per cent loan-to-value mortgage. (Since this trend is not evident from the traditional interest rate series published by the Central Bank in line with international standards, we have been working on the assembly on a rigorous basis of additional statistical series on mortgage interest rates, and expect to publish these as from data for January 2015.) These rates indicate that standard variable rate borrowers are still paying less than they were before the crisis, but not by much. A widening of mortgage interest rate spreads over policy rates also occurred in the UK and in many euro area countries after the crisis, but spreads have begun to narrow in the UK and elsewhere. Until very recently bank competition has been too weak in Ireland to result in any substantial inroads on rates.
...
What is the role of the Central Bank in the area of mortgage interest rates? From the prudential point of view, we could have a role in seeking to ensure that banks set rates on new business sufficiently high to cover the risks of future default. While the current spreads would not have been sufficient to compensate the banks for the risks they actually took in the boom, much of which still embedded in the existing stock of mortgages, I think it would be hard to argue that mortgage underwriting today was so bad as to require such a high margin on new business. Inevitably, though, constrained by their inability to restore spreads on trackers, the banks have sought all means to restore their profitability including the widening of standard variable rate spreads, which typically apply to old as well as new business.
...
As in most advanced economies, in Ireland it has long been understood that tight administrative control over the rates charged by banks would be counterproductive in ensuring a sufficient flow of properly priced credit on a lasting basis. For one thing, such control would strongly discourage new entrants. Therefore, while interest rate spreads are now high, since national credit policy is crafted with the welfare of the people as a whole being the “constant and predominant aim”, I see no sufficient basis for altering this view.
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