The Irish Mortgage Market - Submission by the Fair
Mortgage Rates Campaign to the CCPC
20th March 2017
Initial comments
It is extraordinary that the state body charged with consumer protection through
advocacy and public awareness has taken no action at all on this issue. It has not
studied the issue. It has not even raised questions about why rates are so high in
Ireland. It has not even asked the Central Bank why they were publishing misleading
information about mortgage rates. When Michael McGrath wrote to the Commission
in 2015, asking them to take an interest in the issue, the reply was that “the
Commission’s resources would be more appropriately used in other areas.”
While we welcome this consultation, the CCPC must stand condemned for washing
its hands of this issue up to now. During that period, Irish borrowers have paid
around €1.6 billion in excess interest. They continue to pay around €800m a year in
excess interest.
The CCPC’s lack of involvement has resulted in a lack of understanding which is
reflected in the Consultation Paper, most notably in not asking the fundamental
question – “To what extent, if any, are the higher mortgage rates in Ireland justified
by higher costs?” So our submission will begin with this question.
The question which should have been asked in the Consultation Paper:
To what extent, if any, are the higher mortgage rates in Ireland justified by higher
costs?
Irish variable mortgage rates are around 1.7% higher than the equivalent rates in
other euro area countries. This is costing Irish borrowers around €800m a year in
additional interest. If these higher rates are justified by higher costs, the number of
market players and the extent of competition are not very relevant. If the higher
rates are justified and a new lender enters the market, it won’t result in a
significant reduction in the mortgage rate.
0.1 To what extent are the costs higher in Ireland? Please explain your answer with
supporting evidence, data and a quantification of the extra costs.
0.2 Irish lenders have had huge losses on their mortgage books in recent years. Do
these losses justify them in charging new customers to compensate for those
losses?
0.3 Around 50% of the mortgage book is cheap tracker mortgages on which banks
are either making very little money or losing money. Are they justified in
charging new non-tracker customers higher rates to compensate for the lack of
profits on cheap trackers?
There is no justification at all for Irish lenders to charge more than euro area lenders for
50% LTV mortgages
The lowest untied mortgage rate is AIB’s rate of 3.1% for LTVs of less than 50%. The
average rate for all LTVs in the euro area is 1.72%. It’s reasonable to assume that the rate
in the euro area for LTVs of <50% is below 1.5%.
Therefore Irish borrowers with LTVs of below 50% are paying at least 1.5% more than
their euro area counterparts. In other words, they are paying double the rates.
All of the costs for 50% LTV mortgages are the same in Ireland as in the rest of the euro
area:
 The cost of funds is the same
 The cost of administration is the same
 The cost of capital is the same
And
 The cost of risk is the same
The arguments about the high level of arrears, the high levels of defaults and the
difficulties lenders face when seeking to enforce their security have no relevance at all to
50% LTV mortgages.
Borrowers with 50% LTV mortgages are much less likely to go into arrears. But even if
they do go into arrears, the lender continues charging the full rate of interest on the
arrears. And as it’s a fully secured loan, they will collect that interest eventually.
Most borrowers with 50% LTV mortgages who go into arrears get back on track. Maybe
the arrears are capitalized. But again, that does not cost the lender a cent. They earn
more interest on the higher mortgage balance.
Even if the lender is forced to take legal action to repossess the property and even if it
takes 5 years, so what? The interest continues to accumulate during that period and the
full loan and interest will be repaid from the proceeds of sale.
The Central Bank has the data on these:
 Default rate on non-tracker mortgages with LTV <50% - very low.
 Incurred losses on non-tracker mortgages with LTV <50% - zero.
They should publish these data, so that potential overseas lenders would see that the
Irish market is an extremely profitable market despite the arrears histories and difficulties
in enforcing the security.
90% LTV mortgages should be more expensive in Ireland, but by how much?
There is no doubt that the cost of risk is higher in Ireland than in any other euro area
country because the lack of a realistic prospect of being repossessed removes the
incentive to pay for some people.
So how much more expensive should they be? To answer this question, let’s look at the
lenders’ own estimates of the additional costs.
Variable rates for new business customers as at 20th March 2017
KBC (after current account discount)
AIB
EBS
Ulster Bank
Permanent tsb
Bank of Ireland
50%
3.0%
3.1%
3.3%
3.5%
3.7%
3.9%
90%
3.50%
3.5%
3.7%
4.3%
4.2%
4.5%
Difference
0.5%
0.4%
0.4%
0.8%
0.5%
0.6%
The banks realise that the 50% LTV mortgages are risk-free. If they were not risk-free,
then they would have a lower rate for 30% LTV mortgages, or whatever LTV they consider
to be risk-free.
AIB estimates the additional cost of risk of a 90% LTV mortgage to be 0.4%, whereas
Ulster Bank estimates it to be 0.8%.
The other costs are the same for Irish banks as for other euro area banks.
The average rate for a euro area mortgage is 1.72%. Although it is not published
separately, the average rate for a 90% LTV mortgage would be higher, say 2%. The fair
mortgage rate for a 90% LTV mortgage in Ireland should be around 2.8%, i.e. 0.8% higher.
In fact, they range from 3.5% to 4.5%.
The high level of legacy arrears is not a justification for overcharging new customers.
It is argued that the lenders have to be profitable so they have to charge high variable
rates to make up for the historic losses.
There is no logic to this argument. Why should today’s customer pay for a mistake made
by the lender 10 years ago? The illogicality of that argument would be demonstrated
quickly if a new lender were to come into the market unburdened by any legacy arrears. If
they started charging lower rates, the existing banks would have to reduce their rates
accordingly to compete for new business.
Not only is the historic losses argument illogical, it is also factually incorrect. The historic
losses are no longer dragging down the profits of Irish lenders. The Irish lenders have
made full provision for the arrears. In fact, for the last two years, they have been writing
back their provisions. So, if anything, the legacy arrears are now enhancing the profits of
the Irish lenders.
The high proportion of cheap trackers is not a justification for the high rates either.
It is argued that because the lenders are losing money on trackers, they must make up for
it with the non-tracker mortgages.
There is no logic to this argument either. If a pub charges some customers €1 for a pint,
they will not be able to charge others €9 to compensate. The customers would simply
move to another pub. Of course, Irish borrowers can’t do this at present, because all the
Irish lenders are charging the equivalent of €9 for a pint.
Again, if a new lender, without the tracker drag on profitability, were to enter the market
and charge lower rates, the existing lenders would have to cut their rates to match.
Standard Variable Rate – the Appropriate Comparison?
2.4 Given that mortgage products in other jurisdictions may be significantly
different to those offered in the State, is comparing SVRs across countries a valid
comparison? For example in other jurisdictions mortgage lenders offer teaser
rates for an initial term, or longer-term fixed rates, or tie borrowers to other
products such as life assurance. Please support your views with relevant data,
analysis or experience.
It is important to note that the only lender still quoting an SVR based rate for new
customers is Ulster Bank. All other lenders are now offering some version of LTV
(Loan to Value) rates to new customers. So the Standard Variable Rate has no
relevance to them whatsoever.
To make fair comparisons, the rates on offer to new customers in different euro
area countries should be compared. (New customers are not just first time buyers.
The category also includes movers and switchers.)
The fact that products may be different should not prevent a comparison from
being made. There are two approaches:
 Compare similar products in different jurisdictions
 Make adjustments so that different products can be compared
So rather than just say “comparisons can’t be done, because some lenders tie in
mortgage protection insurance to get the lowest rate”, instead compare untied
products in other euro area countries with untied products in Ireland.
And rather than say “there are initial fees in some other countries, so we can’t do
comparisons”, instead adjust the comparisons for the initial fees.
Whatever comparison is used, Irish rates will still be around 1.7% higher than in
the rest of the euro area.
Teaser Rates
The UK and Ireland are the only markets of which we aware, where some lenders
offer teaser rates. We don’t believe that it’s a common practice in the euro area.
But we are open to correction on that.
The UK is often quoted as the home of teaser rates. That is true, but even in the UK,
non-teaser rates are on offer and so it’s easy to make comparisons.
For example, HSBC in the UK has the following lifetime trackers
LTV
Initial fee
60%
75%
75%
£999
£999
0
Margin over Bank of
England rate
1.84%
1.89%
2.39%
Actual rate today
2.04%
2.14%
2.64%
Likewise Munt in Holland has plain vanilla mortgages without teaser rates. The rate
for 60% LTV is 1.85% compared to the lowest rate in Ireland which is 3.1% - which, of
course, does not have the comfort of a tracker rate.
Loan to Value
Fixed period
t/m 60%
t/m 80%
t/m 90%
> 90%
Variable
1,85%
2,00%
2,15%
2,55%
5 year
1,59%
1,74%
1,89%
2,29%
10 year
2,13%
2,28%
2,43%
2,83%
15 year
2,44%
2,59%
2,74%
3,14%
20 year
2,59%
2,74%
2,89%
3,29%
25 year
2,68%
2,83%
2,98%
3,38%
30 year
2,70%
2,85%
3,00%
3,40%
ABN’s rate card is fairly similar.
Irish lenders do offer teaser rates from time to time. Ptsb offers a 0.5% discount for
the first year. KBC has different rates for new customers and existing customers.
Tied products
Some Irish lenders do have tied products and are still much dearer than other euro
area countries. KBC offers a 0.2% discount to mortgage holders who have a current
account with KBC. So KBC is making profits from the current account and still
charging a mortgage rate around 1.5% higher than the euro area average. Likewise
Ulster Bank has loyalty rates for customers who maintain their current accounts with
Ulster Bank. So again, they make profits on the current account and on the
mortgage.
Although Bank of Ireland does not have a tied product, 75% of their new mortgage
customers take out a life assurance policy through BoI Group and 55% take out a
general insurance policy through BoI Group’s insurance partners. More information
Many Irish lenders make profits from cross-selling or tying in products and yet still
charge very high mortgage rates.
Any comparison of non-tied mortgages in other euro area countries will still find that
Irish rates are much higher.
Cash back/Initial fees
Other markets have initial fees where a borrower is charged for the setup of a policy.
Irish lenders do the exact opposite – all lenders pay cash back or cover the
borrower’s legal costs.
This does not make comparisons invalid. It simply means that adjustments should be
made to make the comparisons fairer.
Fixed rates
It is not clear why fixed rates are mentioned in the same sentence as Standard
Variable Rates? Comparisons should be done between fixed rates in Ireland and
fixed rates in other euro area countries and between variable rates in Ireland and
variable rates in other euro area countries.
Long term fixed rates are not on offer in Ireland. The longest fixed rate term available
in Ireland is Bank of Ireland’s 10 year fixed rate of 3.95%. Compare this with Munt’s
2.13% rate. Adjusting for the 3% cash back, the Bank of Ireland rate would be
reduced to 3.65% - still 1.5% higher than Munt’s.
How to get around the problems of averages
Averages can be difficult to adjust for. So why not compare the lowest rates available
in different countries for similar products?
AIB has the lowest rates for untied mortgages in Ireland, ranging from 3.1% to 3.5%.
Compare this with the lowest rates on offer in other euro area countries.
Make an adjustment for the fact that AIB pays the legal fees whereas, the practice in
other countries is to charge administration fees.
Whatever comparison one does, average or lowest rates, fixed or variable rates, tied
or untied products, Irish mortgage rates will be far higher than the comparable euro
area rates.
Operational Barriers to Entry
2.6
(b)
What measures do you think would be beneficial to attract and
facilitate entry into and operation within the Irish mortgage lending market?
Please explain your answer.
A proper mortgage pricing model would charge new customers an administration fee to
cover the cost of setting up the mortgage. But, in Ireland, all lenders give cash back to
confuse customers and distract them from the very high rates.
When lenders engage in gimmicks such as cash-back, it becomes very difficult for an
ethical lender to compete. Imagine the difficulty a new bank would have in attracting
customers with an up-front charge of €800 when three Irish lenders are confusing
customers with cash-back of €6,000!
Practices such as KBC offering lower rates to new customers, without highlighting that
they do not pass on rate cuts to existing customers, give them an unfair advantage over
new lenders which have fair and transparent lending practices.
Measures should be introduced to make all lenders compete in a fair and transparent way
and to encourage them to compete on rates alone:


Cash incentives should be banned.
Lenders should be prohibited from charging different rates to new and existing
customers who meet the same criteria.
Other Potential Barriers to Entry
Default, Credit Risk and Repossessions
(a)Do you think the arrears profile and the related levels of default in Ireland are
acting as a barrier to entry or expansion into the mortgage lending market? Please
explain you answer with supporting evidence, data or experience.
(b)Do you think the
repossession policies and practices in Ireland are acting as a
barrier to entry or expansion into the mortgage lending market?
When foreign lenders take a quick glance at the Irish market, they see the high levels of
arrears, the high losses incurred in the past and the difficulty in repossessing houses. This
seems to be enough to make them walk away.
This is a huge mistake as they are missing out on a very profitable opportunity. The high
defaults losses of the Irish banks were mainly incurred on mortgages with the
combination of 100% LTV and 5 times Loan to Income.
Despite the economic turmoil and the 50% fall in house prices, Irish lenders have suffered
only very small losses on loans which were issued at 80% LTV and 3.5 times income.
They have suffered virtually zero losses on loans which were at 50% LTV.
The Central Bank has these loan loss data but refuses to publish them. If the Central Bank
were serious about attracting a new entrant into the Irish market, they could publish the
anonymized loss data on 80% LTV lending and 50% LTV lending and send them around to
potential new entrants.
The difficulty in enforcing the security is a particular problem in Ireland, but it’s only a
problem for high LTV mortgages. Borrowers who have a 50% LTV mortgage, may lose
their job and go into arrears, but such borrowers make greater efforts to get back on
track because of the risk of losing their homes. Even if the lender has no option but to
seek an order for possession, and even if it takes bank 5 years to get an order for
possession from the courts, so what? The lender continues to charge the full interest on
the loan during that period. And the lender will be repaid the capital and unpaid interest
when the house is eventually sold.
Legislative Options
2.10 In response to the current environment there are legislative proposals to
cap mortgage rates.
(a) What impact do you think interest rate controls would have on market
entry? If possible please draw on experience internationally.
(b)
In your opinion what would be the impact if such controls were to be
introduced?
It would depend on the cap. There are caps in place in many European countries
with competitive mortgage markets. An appropriate cap should achieve the objective
of bringing down mortgage rates.
Legislative options not involving a cap
It’s possible that a more competitive market which would result in lower rates
could be achieved without an actual cap. Cash backs and teaser rates could and
should be banned. Lenders would have to compete on rates, and not on gimmicks.
Lenders should be obliged to pass on rate cuts to existing customers.
Lenders could be obliged to set a Reference Rate and price each person’s mortgage
based on that. If they bring down the Reference Rate it would apply to all
customers equally. So the Reference Rate for an 80% LTV mortgage might be 3.5%
today. The rate for a 50% LTV mortgage might be the RR -0.5%. The rate for a
mortgage in excess of 90% might be RR + 1%. If the lender reduces rates in
response to competition, they would have to reduce the Reference Rate which
would benefit all customers. This is the model which Ulster Bank uses at present,
as illustrated by their rate card.
Scale of Opportunity in Irish Mortgage Lending
There are about €32 billion of mortgages which could switch if a lower rate were
available. (See Appendix 1.) These loans meet the following criteria:
 Loan to Value of less than 80%
 Non-tracker mortgage rate
 Clean credit record.
Value of Residential Mortgage Market Drawdowns in 2016
First Time buyers
€2,593m
Movers
€2,219m
Switchers
€ 524m
Top ups
€ 161m
Total
€5,497 m
So there is a target market of €32 billion of existing business plus around €5 billion in new
mortgages issued each year.
There is plenty of scope for a new lender offering up to 80% LTV mortgages to build up a
profitable business with very low default levels.
Switching
(f) Are the products on offer attractive and secure enough for consumers to
switch?
Between 2005 and 2008, mortgages to the value of €6 billion switched each year. But
during that period, there was a reason for switching as competition was intense due to
the entry of Bank of Scotland into the market. The cheapest mortgages were a lot cheaper
than the dearest ones. And mortgages were easier to compare. There were no cashbacks. Banks were offering tracker mortgages, so borrowers knew that if they switched,
the rate would remain competitive for the life of the loan.
Compare that to now. Pricing is less transparent. Cash back makes it difficult for
borrowers to compare rates. Even if it makes sense to switch to a different lender
because their rate is lower today, they may not pass on rate cuts in the future, so the
switching decision could be a mistake.
If any lender were to offer rates closer to the euro area rates, the benefits from switching
would be sufficient to overcome all the excuses given for not switching: legal costs,
apathy and the hassle factor.
Appendix 1
Estimating the potential of the Irish switcher market
Total home loans
Home loans less than 80% LTV – 61%
Exclude trackers of around €20 billion
Exclude those with an impaired credit record – around 20%
Total non-tracker, clean credit record with <80% LTV
Assumptions and estimates
Calculating the % of the loan book which is less than 80% LTV
Total
AIB
BoI
Loan book < 80% 39,061
17,857
13,404
Total loan book
63,756
28,631
19,839
%
61.66%
€100 billion
€ 60 billion
€ 40 billion
€ 8 billion
€ 32 billion
Permanent tsb
7,800
15,286
While around 50% of all mortgages are trackers, most trackers were taken out during the
peak years. So it’s likely that they form around 33% of the book which is less than 80%
LTV.
Around 20% of mortgage holders have an impaired credit record. But again, the
proportions are much higher for those with high LTVs. It’s likely that those with an LTV of
<80% are more likely to have clean credit records. However, no adjustment has been
made for this.
AIB Page 104 of 2016 Annual Report
Bank of Ireland page 367 of 2016 Annual Report
PTSB 2016 Annual Report Page 182