Ceann Comhairle I move this evening a Private Members Motion of behalf of my Fianna Fáil colleagues on the subject of standard variable mortgage rates.
At the outset I want to put on the record my view that excessive variable mortgages rates are the number one financial challenge for thousands of families throughout the country. This is an issue of money in people’s pockets and what is happening at the moment can only be described as a rip-off.
Number of people impacted
In November last year four of the banks appeared before the Oireachtas Finance Committee. We know from information provided to the committee that this is a situation that affects tens of thousands of families and the rates being charged cannot be justified based on the evidence given by the banks.
To put this this issue in context, permanent tsb told the committee that they have 79,100 variable rate customers with an average balance of €88,500. In addition 60% of AIB residential mortgage customers are on variable rates or approximately 130,000 families. In the case of Bank of Ireland 33% of customers are in this category representing another 70,000 cases and while Ulster Bank and Danske have not provided data we can safely assume that there is over 300,000 variable rate mortgage customers in Ireland.
This is a massive issue for households across the country.
In fact it would be a good starting point for the banks to be a lot more transparent and provide more relevant and timely data. The Central Bank should insist on this and make the information available in an accessible format.
Cost of high variable rates to families
These families stuck on variable rate mortgages have benefited least from the current low interest rate environment in Europe. In fact they have watched in absolute frustration as their mortgage rates have steadily risen as rates generally have fallen. In essence they have been trapped in a situation which is costing them hundreds of euro a year yet receives little or no attention from government.
Taking the example of a customer with a €200,000 mortgage and 20 years remaining – the standard variable rate they will pay as an existing customer at the moment is 4.5%. For new customers with a 20% deposit, rates as low as 3.69% are available while the average tracker customer will pay approximately 1.15%.
The existing customer is therefore paying €992 a year more than someone who can avail of offers available to new mortgage customers and €3,874 a year more than families with a tracker rate. In many instances the impact is more than double that of the property tax and water charges combined. These are huge sums of money to any family and rightly demand our attention in this House.
High rates are not justified based on banks costs of funds
I anticipate that the response of the banks to this motion will be to state that standard mortgage rates reflect their cost of funds. It is worth noting therefore what they actually told the Oireachtas committee in November and I am quoting here from the documents they supplied in advance of the meeting.
Permanent TSB The blended cost of funds is 1.74%
BoI “for the 6 month to 30th June 2014 our cost of funds was 1.15%.”
AIB “For the 6 months to 30 June 2014 AIB’s cost of funds was 1.64%”
Ulster Bank “Ulster Bank is not required to publish its accounting cost of funds and for reasons of commercial sensitivity we are not in a position to provide this information.”
Rates of 4.5% are therefore well in excess of the banks’ cost of funds according to their own data. The banks’ arguments are in a word “bogus”.
A 2012 Central Bank report concluded that “It appears that some lenders are charging higher variables rates to compensate for the losses they are making on their tracker loans… A risk with such a strategy is that it may be counterproductive and continue to exert upward pressure on arrears,” In other words what banks are doing is not just putting a huge financial burden on families it also may be proving counterproductive for the company itself in that it is driving up arrears levels.
In his address to the Oireachtas Finance committee Governor Honohan accepted “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.”
Therefore it is my contention that what the banks are doing cannot be justified based on their costs. They are simply gouging a vulnerable group of customers and action is needed to stop this immediately. The banks’ case that they have no choice but to charge these rates simply does not stack up.
Bank losses on tracker mortgages are not a reason to rip-off SVR customers
I also want to address the notion that bank losses on tracker mortgages are somehow a reason to rip-off SVR customers. I recognise that the presence of tracker mortgages on banks’ loan books represents a significant drain on their profitability. In the case of Permanent TSB it described its losses as “eye watering”. However the idea that the banks can justify ripping off one group of customers to make up for bad decisions they made elsewhere is outrageous and cannot be tolerated.
Need for direct government engagement
Our Dáil motion is three pronged. We want the government to engage directly with banks, particularly the state owned banks to emphasise to them the seriousness of the situation. It is simply not acceptable that the much vaunted Economic Management Council has not met with the banks directly since June 2012 to discuss this or other serious economic issues such as mortgage arrears.
In the past the Government claimed success in persuading the banks to reduce their variable rates. Minister Noonan made much of persuading AIB to reduce their Standard Variable Rate by 0.25% in November 2011 following the ECB rate cut. However since then, little or nothing has been done since.
Former Minister of State Brian Hayes at one time described the failure of the banks to pass on ECB rate cuts as pathetic and acknowledged the seriousness of the situation noting that “It’s fair to say that the implications of what was happening when the banks were increasing mortgage rates wasn’t recognised. Clearly, an eye was taken off the ball.”
If the Minister for Finance was persuasive in 2011 he can do try doing so again. He should immediately call the banks before the Economic Management Council or through some other appropriate mechanism and make clear to them that the current situation cannot be allowed to continue.
The Government amendment put forward tonight notes that “the Statement of Government Priorities 2014 to 2016 recognised that promoting and encouraging competition and new entrants in the banking sector was required to put downward pressure on interest rates for variable rate mortgage customers, both new and existing”. This is little more than wishful thinking. What we need is action now to deal with the situation.
The Government also need to play an active role in defining what a competitive banking landscape would look like in Ireland by publishing a white paper on the subject. 7 years on from the onset of the crisis our banks may be stabilised but we are a long way from a normal banking system.
Role of the Central Bank
The second aspect of our motion to call on the Central Bank to step up to the plate and take a much more hands on role in consumer protection. Last year Governor Honohan implicitly accepted that mortgage rates for existing variable rate customers were going in the wrong direction in the context of record low ECB rates stating “It is reasonable to ask whether, having under-priced lending so badly in the early years of the millennium, they could end up over-pricing it now.”
I think we should all accept that the Central Bank do a good job in their macro prudential role of protecting the stability of the banking sector. A peer review of the Irish Central Bank published this week indicated that the Central Bank needed to do more to protect the interests of consumers. Action in respect of existing variable rate customers would be a good point from which to start.
Reduced rate offers must be made available to existing clients
The third key issue is that the banks must consider the long term damage they are doing to their own brand. Mortgage interest rate reductions by Permanent TSB and Bank of Ireland for new borrowers announced in January are deeply unfair as they will do absolutely nothing to address the continuing unfair treatment of their existing variable rate customers.
The announcements at first glance represent an overdue injection of some competition in to the stagnant Irish mortgage market. However, the vast majority of customers will not benefit.
The fact that reductions will only be enjoyed by new customers further highlights the unfair way in which existing customers are treated by the main banks. When AIB reduced its variable rate by 0.25%, it did so for new and existing borrowers. The decision by Bank of Ireland and PTSB to restrict the lower rates to new customers means the benefit that will be felt is actually minimal. In essence, this can be seen as little more than a panicked reaction by these providers to the negative publicity associated with the continuing excessive rates they charge to their existing customers. Bank of Ireland and PTSB should follow the lead of AIB and ensure fair treatment for all customers.
Banks must open up the market for switcher mortgages
I would also like to address the issue of product innovation on the part of the banks. It is my view that the switcher market is largely a mirage. Banks like to give the impression that they are willing to take on the mortgages of existing customers of other institutions but in reality very few are ever completed as can be seen from responses given to the Oireachtas Finance Committee. Again I would like to note the evidence that was provided by the banks.
PTSB: “The number of switcher mortgages completed so far this year has been very low”
Bank of Ireland: “Switcher drawdowns would be a very low proportion of business year to date.”
AIB: “AIB is open and available to Switcher mortgages, activity however remains relatively low for AIB and the market and numbers are minimal.”
Ulster Bank; “For reasons of commercial sensitivity, we are not in a position to provide this information.”
We can infer from this that very few if any are undertaken. This underlines the weak competitive nature of the mortgage market in Ireland and means that thousands of customers are effectively trapped on high SVR rates with no escape route.
Failure to make switcher mortgages available on a widespread basis will only further fuel the view that the banks are more interested in optics than in providing a genuinely competitive mortgage market.
In summary Ceann Comhairle, I would emphasise the practical actions we believe should be taken to improve the current lot of variable rate mortgage customers.
- Transparency from the banks as to the number of existing variable rate customers on their books and their cost of funds.
- Direct engagement by the Minister for Finance with the banks to persuade them to reduce variable rates in line with their falling cost of funds.
- A commitment by the banks to make reductions in variable rate mortgages available to all customers, not just new clients.
- Product innovation to make switcher mortgages available more widely.
- An examination of the level of competition across the banking sector and action to address deficiencies.
- Greater urgency from the Central Bank to uphold their role as the protector of consumer interests