On Tuesday evening the Dail kicked off a debate about a Fianna Fail motion on standard variable mortgages (SVR). Interest rates on these loans are still high by European standards and are also above the rates offered by banks to new borrowers.
The cost of funds for banks has been coming down, but SVR rates for existing borrowers remain high, running from 4.15 per cent to above 4.5 per cent. In contrast, the lucky tracker mortgage holders are now paying rates averaging 1 per cent. Of course the reality is that the high rates being paid by the SVR customers are subsidising the trackers.
Is this fair? A lot that happened during the crisis would not meet that criteria, and certainly SVR customers have got a raw deal. Apart from AIB, the main banks all offer lower SVR rates for new customers than for existing ones. You could argue what the “proper” rate should be, but the fixed rates offered by the banks to new borrowers are now below 4 per cent, even out to five years.
Rates in other EU markets are also significantly lower and even if conditions vary between markets, SVR rates here still look high. The issue for the banks is the yield on the trackers and the need to compensate by pushing up margins elsewhere.
The problem is what to do about it. The banks argue that when you take the whole mortgage loan picture together, Irish banks are offering competitive rates. The average rate on all mortgages, according to the Central Bank, is 2.73 per cent. This is very low by historical standards, though still close to 0.4 of a percentage point above the EU average. The gaps are larger for other lending rates – the interest rate on loans to SMEs, for example, is 5 per cent, more than 2 points above the European average.
The Dail debate– and a debate on RTE’s Prime Time last night – focused on whether the Central Bank should be more active in pressuring banks to reduce rates and on what role the government might take. As owner of Permanent TSB and AIB, the Government could – no doubt – put some pressure on, though it says it manages the banks “ at arm’s length.” Also, it is planning to sell stakes in Permanent TSB and AIB in the months ahead and so won’t be rushing to do anything that hits bank profits too hard. The Competition and Consumer Commission told Fianna Fail spokesman Michael McGrath last December that it did not intend to launch any new probe into the issue.
That leaves competition. There are signs of competition growing in the mortgage market, mainly for new borrowers but slowly starting to spread. AIB cut its SVR for all borrowers in December and there is now some activity among banks in trying to lure switchers.
More of the same is the best hope in the short term for the SVR holders, who have a case given that their contracts generally say rates should move in tandem with the markets. At some stage new entrants will start looking at the market there, too, as the banking market recovers.
There is one other underlying factor to consider. Interest rates are at extraordinary lows in general at the moment. This looks set to continue for a period, though at some stage the interest rate cycle will turn, as is now anticipated in the US. Let’s hope the SVR borrowers get some time to benefit from low rates before this happens.
