herald

Monday 5 December 2016

Cut variable rates by more than 0.25pc, and cut them now

Getting Irish banks to cut their variable mortgage rates has been like trying to extract blood from a stone.

Despite official ECB interest rates having been cut to an all-time low and the banks paying most depositors a pittance in interest they have obstinately refused to cut their variable mortgage rates to reflect lower funding costs.

The most recent data from the Central Bank shows that the average mortgage variable interest rate charged by the banks stands at about 4.2pc. This compares to official ECB interest rates of just 0.05pc. But what about the Irish banks' higher funding costs?

While it is true that the Irish banks had to pay depositors very high interest rates during the worst days of the financial crisis, that era has long since passed. The most recent data shows that the average interest rates paid by the banks to their depositors have also fallen sharply.

Between them, Irish households and non-financial companies have just under €130bn on deposit with the banks. The bulk of this, about €80bn, is made up of demand deposits on which the average annual interest rate is a barely visible 0.3pc.

A further €22bn consists of short-term demand deposits on which the average interest rate is a mere 0.64pc. Only on longer-term demand deposits, where the depositor has to lock up his or her money up for at least two years, does the average annual interest rate paid exceed 1pc.

This fall in deposit rates makes a nonsense of any claims by the banks that extortionately high variable interest rates are needed to compensate them for their loss-making tracker mortgages.

In fact, at current deposit rates, it is clear that the banks are no longer losing money on their trackers where the average interest rate now stands 1.04pc.

So why, if they no longer need to subsidise their loss-making trackers are the banks still screwing their variable rate mortgage customers. That's because, as the man says, they can.

profits

With most of the foreign banks having exited the Irish market and the 90pc-plus fall in new mortgages making it impossible for homeowners to switch mortgage lender, the banks can pretty much do what they like to their existing customers.

But now, to paraphrase the Howard Beale character from the 1976 movie Network, we're mad as hell and we're not going to take it anymore.

With both AIB and Bank of Ireland now making annual profits of close to a €1bn each, it's high time that the banks began to pass on the benefits of their lower funding costs to their variable rate mortgage borrowers.

At last there are signs that this may be happening. Appearing before the Oireachtas Finance Committee this week, AIB boss David Duffy hinted that his bank would cut its variable mortgage rate by 0.25pc in June.

Big deal! Why not cut variable mortgage rates now?

And while you're at it Mr Duffy, why cut rates by just 0.25pc? A 0.25pc cut in the variable mortgage rate would save a family with a 25-year €300,000 mortgage just €42 a month.

While a 0.25pc cut is better than nothing at all it is clear that variable mortgage rates must be cut by much, much more to reflect the banks' lower funding costs.

At least AIB has signalled its intention to start cutting rates. So far we have heard nothing from the other banks, most notably Bank of Ireland - whose boss Richie Boucher has on occasion been known to behave like a complete banker. Meanwhile the more than 300,000 households stuck on variable rate mortgages and unable to switch lender continue to be fleeced.

If variable rates were to be cut to a level that reflects the banks average funding costs then they would fall to somewhere between 2.5pc and 3pc. Such a cut would save the family with the €300,000 mortgage between €203 and €280 per month or between €2,436 and €3,360 per year.

The variable mortgage rate rip-off has gone on for far too long already. It must stop now. The banks are highly profitable once again and their funding costs have fallen to much lower levels.

These savings must be passed on mortgage borrowers without any further delay.

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