Sunday 23 October 2016

Capping mortgage rates means everyone will pay more to banks

On the surface, capping mortgage interest rates seems like a good thing for consumers.

It's certainly populist, but that's not always good.

Irish mortgage holders have been paying over the odds for years and they're frustrated by the lack of Government effort to help them.

They'll remember Finance Minister Michael Noonan threatening banks with a fine if they didn't pull their socks up, but nothing happened. So, you'd imagine he'd be behind this new rate-capping Bill, rather than calling it "flawed" and "unconstitutional".

There's more than a little irony about Fianna Fail introducing such a Bill, when they were the party which signed off a massive bailout of banks by the taxpayers, whose profits they are now seeking to stymie.

There's no doubt that mortgage holders on standard variable rates are paying more than they should.

More than their European counterparts (double in some cases) and far more than the lucky tracker customers who they are heavily subsidising.

Banks are reaping the profits because they are borrowing the money at 0pc from the ECB before lending it on at up to 4.5pc. It's nothing short of wholesale trousering, so you'd think any effort to put a halt to their gallop would be a good thing. But it isn't.

Only 40pc of homeowners in Ireland have a mortgage. Of those, around half are on trackers, paying little or nothing over their capital repayments. The other customers have variable rates and they will, if this Bill is passed, see a reduction in their monthly repayments. So far so good for them.

However, a few unintended consequences will follow. The first is that banks need to recoup that profit, already built into their books. Given so many of them owe billions to the taxpayer, not making up the gap isn't an option.

They will do this in the only way they can - by increasing fees and charges on other products, like current accounts, loans, insurance and credit cards, which will apply to all customers.

Secondly, Mr Noonan is attempting to sell off the banks the taxpayer has bailed out. We own, in full or part, AIB, EBS, Permanent TSB and a bit of Bank of Ireland. Making these banks attractive to foreign investors is vital, or buyers won't touch them with a bargepole - leaving us saddled with them for even longer.


The banks become attractive with an increasing share price and good loan books. Both suffer if interest rates are capped. Even publishing this Bill caused bank shares to collapse by 10pc - what will happen if it passes?

Well, banks will step up repossessions, for one, as they seek to remove risk from their books. If someone hasn't paid their mortgage in two years at 4pc, they're not going to suddenly start at 2pc. What's sauce for the goose isn't always sauce for the gander.

Then there's the Central Bank. Officials there see capping interest rates as uncompetitive (which it is), and their independence means they may well ignore the attempt. Then what?

Competition is already leading to reductions. AIB has dropped its rates four times in 18 months and a fifth is on the cards. Others have done the same, or introduced lower fixed rates, or switching incentives.

An incoming player Frank Money, has promised interest rates of 2-2.5pc. That alone will cause the others to take fright.

Finally there's the argument about whether you should do something just because you can.

Why doesn't Fianna Fail or the Government introduce a Bill capping energy prices, for example? Or car insurance premiums?

All are run by businesses, just like banks, and all are ripping off their customers, just like the banks are.

Why not a Bill capping airline fares, or the extortionate price of a latte? Once you start meddling, it's a mug's game, and the Government's the mug.

This Bill might seem like a good idea but the far reaching ripples will only make things worse, not better.

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