Laws to cut mortgage rates could be counter productive
A lot of mortgage customers feel ripped off.
The reason is simple. Many people on standard variable rates are paying interest between 3.1% and 4.5%.
Those lucky enough to have trackers are generally paying between 0.5% and 1.5%.
So it is not surprising that the people with variable loans aren’t happy.
The new Programme for Government promises to tackle the problem.
It says it is “not ethically acceptable for Irish banks to charge excessive interest rates on standard variable rate customers.”
It continues that the new Government will ask the Central Bank and Competition & Consumer Protection Commission to work on the issue.
It will ask them to set out the options on “market structure, legislation and regulation to lower the cost of secured mortgage lending and improve the degree of competition and consumer protection.”
Improving competition is always welcome.
The tricky part is introducing legislation to enable the Central Bank to lower mortgage rates.
Is this a good idea? To answer this, it is worth considering why Irish standard variable rates are higher here than in other euro zone countries.
If Irish banks were making enormous profits on mortgages compared to other states there should be a wave of new entrants coming into the market to join the bonanza. But there is no sign of that.
The view of some observers is that the money markets, which lend to Irish banks, charge Ireland a premium over some other countries.
This is because the money markets want to know how quickly they will get their money back in the event that somebody is unable to pay their mortgage.
It is an unpalatable fact of life that the faster homes can be repossessed by banks in any country, then the lower the interest rate that the money markets will charge banks who lend money to people who buy homes.
Another way of looking at it is there are 746,000 mortgages in Ireland of which 88,000 are behind on repayments.
The most acute problem is the 36,000 which are two years or more behind on repayments.
So the people who are paying standard variable mortgages are paying a premium for those who are in arrears.
That is not to suggest that there should be a wave of repossessions to address that interest rate issue.
Sorting out the arrears issue is a major social problem which should be dealt with sympathetically. It is understandable that many people became embroiled in mortgage difficulties during the crash when they lost jobs and the value of their homes collapsed.
But one of the unforeseen consequences in the delay in sorting out the arrears crisis is that the money markets are charging the Irish banks higher interest rates than financial institutions in other countries.
So dealing with arrears could help to solve the problem of standard variable rates.
There are also some significant downsides to giving the Central Bank powers to legislate on mortgage rates.
The Government plans to float 25% of AIB, which should return some of the almost €21bn the taxpayer invested in the bank to rescue it in the crash.
However, if the State controls how much banks can charge for products, investors may baulk at the idea of investing in AIB.
But the broader issue is that investors in general may become wary of lending money to banks at favourable rates if they detect what they perceive as unnecessary State interference.
Pushing down mortgage rates could lead to a rise in charges on other products such as lending to small and medium businesses.
While politicians are right to be ambitious to try to resolve the issue of people being charged relatively high rates on their variable mortgages – implementing the wrong solution could be an unintentional step backwards.
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