The Republic has better terms for home loans

Update Brown bullies the banks. Good news for the 10% on standard variable rates and existing trackers. But all trackers are withdrawn for new borrowers. New higher rates linked not to base rate but to the LIBOR (London inter-bank lending rate) from Monday.

Now here’s quite a contrast. From Finfacts Ireland’s weekly press review.

The Irish Independent reports that homeowners will enjoy a reduction of up to €400 a month on their mortgage repayments by the middle of next year, economists predicted last night.
Yesterday, all the main banks said they would pass on the latest ECB rate cut to customers.

The Financial Times

Mortgage lenders tried to defend their decision to withhold the Bank of England’s 1.5 percentage point interest rate cut from borrowers on Thursday, in the teeth of a public and political backlash.

Can anybody explain why bank guarantees from the Irish state are delivering better terms for home loans quicker than UK bank semi-nationalisation ?

  • Mack

    “Can anybody explain why bank guarantees from the Irish state are delivering better terms for home loans quicker than UK bank semi-nationalisation ? ”

    Are you sure that’s the cause? Not all the banks passed on the last rate cut down south. BoI cut by 0.3% rather than 0.5%. First Active increased their rates to 6.1% (for owner occupiers) and 6.4% (for investors). Such tricks have already allowed the banks to improve their margins. Euribor rates have also fallen themselves by 0.3-0.4% in the last month before yesterdays base rate cut.

  • Mack

    Also, another point to consider – the absolute peak of the property boom in the Republic was June 2006. 93,000 houses were completed that year, with something like 80,000 the year before. Many of those homes would have been purchased on nice teaser rates, that will, just about now, be resetting onto juicy high margin Standard Variable Rates. The banks have been raising their STV rates significantly over and above the ECB hikes over the last two years.

  • smcgiff

    ‘The banks have been raising their STV rates significantly over and above the ECB hikes over the last two years.’

    And yet interest rates in the ROI have been significantly lower than UK banks – go figure.

  • George

    I don’t know where you are getting that impression from because the figures are saying the exact opposite to what you claim.

    Lloyds in the UK are currently offering a variable rate of 6.5% on their mortgages with the Bank of England rate at 3% while in comparison the EBS in the Irish Republic is offering 4.88% with ECB rates at 3.25%.

    Northern Rock’s variable rate is over 7.3% while in Ireland the AIB is at 5%.

    These are huge differences. The British mortgage payers are getting completely when you compare these rates with the ones in Ireland.

  • George

    should read “completely shafted”.

  • George @ 01:11 PM:

    Lloyds in the UK are currently offering a variable rate of 6.5% on their mortgages

    Except that Lloyds are now offering mortgages at 5%. Several other mortgagors (HSBC, Britannia) were previously undercutting LloydsTSB.

    Northern Rock’s variable rate is over 7.3%

    Of course, the whole intention is quietly and efficiently to shut down the NR operation, preferably at a profit to HMG and the BoE. Mortgage-holders with NR have been told to look elsewhere: the high rate is an incentive.

    Kaletsky’s Commentary, in today’s Times, may — for once — be the meat-and-two-veg:

    … for the first time since Black Wednesday, Britain is paying less for its money than the Eurozone.

    He concludes:

    … the [BoE]’s willingness to set monetary policy in the national interest without worrying about the weakness of sterling in the past few months means that Britain will enjoy the full benefits of keeping its own floating currency, independent of the euro, while the continental countries bicker about their stability pact and the timidity of the European Central Bank.

  • George

    To be in the same ball park as Irish banks, Lloyds should be offering mortgages at 4.75% as the BOE’s rate is a quarter of a percentage point lower than the ECB. They are still charging more than Irish banks.

    As for Kaletsky, anyone advocating cheaper credit for the country with probably the highest level of private-sector debt in the world is missing the point in my humble opinion.

    The man points to the time when Britain last slashed interest rates in the early 90s. What followed was over a decade of ridiculously cheap credit which has brought us to where we are now.

    Kaletsky’s solution to this problem created by cheap credit? You got it: more cheap credit.

    This move says to me that the BOE isn’t as independent as it lets on. This smells of the governors bowing to political reality that the majority of people in Britain aren’t up to taking the pain.

  • Mack

    George, smcgiff – I’m suggesting that the banks in RoI have already taken steps to defend their margins. The growth in Irish property lending was funded in large part by borrowing on wholesale markets at interbank rates. With the credit crunch Euribor rates went up much further than the base rate, Irish banks withdrew ECB Trackers from the market and increased their STV rates over and above the ECB rates. The Euribor rate, that presumably the Irish banks pay when they borrow wholesale had fallen prior to yesterdays cut, and the banks did not pass on the earlier base rate cut in full. This alone will have improved their margins, giving them more scope for passing on yesterdays cut.
    (We shall see if they actually pass it on in full, many of them may pass it on in legacy trackers – because they have to – but be not as forthcoming in other products. Certainly the Construction Industry Federation (CIF) have been vocal in complaining that the last cut was not been passed on to their members.).

    The huge numbers of Irish mortgage holders coming off teaser rates and onto more lucrative STV mortgages may give the banks further scope to improve the balance sheets naturally and thus pass on the cut.

    The EBS is mutual building society and is perhaps less focused on raw profit as the banks. They are / were, however, willing to lend ridiculous salary multiples. In June one of their salespeople offered us over 6 times _joint_ salary (try paying for child care after that!!).

  • Mack

    George – From the EBS website

    “Are EBS obliged to pass on the full decrease in the ECB rate on all its rates?
    A: If you are on a fixed rate your rate will not change until your fixed rate will expire.
    B: If you are on a tracker rate your rate will decrease by 0.50% (the amount of the ECB change) in next month’s repayment.
    C: EBS has passed on the full amount also to our homeloan variable rate members. There will be no change to the buy to let variables rates.”

    The EBS is not passing this cut onto all customers. change effective in November payments?Opendocument

  • Mack

    George – Although I’m not at all arguing that British mortgage holders aren’t getting shafted.

  • George @ 03:07 PM:

    I take all your excellent points; and I’m not in this to trump your ace. However, when you say:

    To be in the same ball park as Irish banks, Lloyds should be offering mortgages at 4.75% as the BOE’s rate is a quarter of a percentage point lower than the ECB.

    I might equally respond:

    the Nationwide is cutting its base mortgage rate by 1.5%, from 6.19% to 4.69%.

    Anyway, I suspect we’re comparing apples and oranges here. The UK price deflation has further to go, possibly further than the RoI, where it has run for longer, — a long way further. I have one example here: a desirable North London flat went on the market at £425K, now reduced to £349K, “but they’d consider £330K”. That’s today: and there’s not going to be much movement in the market before the Spring, if then. By which time, we’ll likely have a 2% BoE rate.

    I’m reading here today’s Irish Times [“Members of EBS … benefitting from a new rate of 4.88%” — front page]. What caught my eye was Judith Crosbie, from Brussels, in the Business This Week section:

    The ECB rate cut followed the Bank of England’s cut of 150 points. The Swiss National Bank yesterday cut its interest rate by 50 basis points to 2 per cent, only the second cut since March 2003. Denmark’s central bank cut rates by 50 basis points to 5 per cent, reversing an increase just two weeks ago. The Czech Republic’s central bank cut its rate by 75 basis points to 2,75 per cent.

    I read into that the tacit belief that the ECB are, as Kaletsky is suggesting, behind that infamous curve. J-C Trichet let that one out by admitting there had been pressure for a 75 point cut now, and more later.

    I see that the Economist‘s print edition didn’t catch up with the ECB decision — or did I miss it?

  • Glencoppagagh

    If the Irish lenders are less reliant on wholesale funds they probably have better margins since the interest rates they offer retail customers seem very poor to me.

  • Peter

    Perhaps the Irish mortgage market has been and is more competitive than the British one. I would ask that question first before worrying about the bailouts.

  • Mack

    Glencoppagagh – Savings rates aren’t bad at the minute..


    6% 1 year fixed from Anglo Irish Bank – no limits
    5.89% fixed for 20 months PTSB

    8% regular save from Anglo, similar deals from most other banks

    5.22% FA up to €15k
    5.15% Halifax up to €10k

    Given the sheer flood of money into the Irish economy, large amounts of it must be wholesale lending. Working it’s way into the economy via the likes of Anglo, perhaps?

  • Can someone remind me how far demutualising has gone in the RoI?

    Since the EBS is (I assume) still a mutual society, I would expect it to be less exposed to the Libor rate (which is lagging severely on the 1.5% cut) than others. EBS is a big player, proportionately bigger than any remaining UK mutual, not excluding Nationwide. I would therefore expect EBS to be more customer/member friendly than a straight commercial operation; and therefore having a significant clout in the RoI mortgage market.

    Any thoughts?

  • Earlier I wrote:

    I see that the Economist‘s print edition didn’t catch up with the ECB decision—or did I miss it?

    Yes, indeedy. So here, in essence, it is:

    Set against the Bank of England’s derring-do, however, the Frankfurt-based central bank looks like it is not taking the recent sea-change seriously enough. “The world has changed but the ECB seems not to have realised it,” according to Aurelio Maccario, an economist at UniCredit, an Italian bank.

    That seems to me to be fair comment on the whole ECB “achievement”; and — essentially — the bottom-line in this comparison.

  • kensei

    Isn’t this two bald men arguing over a comb? We’re effectively seeing the failure of monetary policy here. Cuts in rates are not being fully passed on, denting the ability of central banks to set the price of money. Even if thse rate cuts are fully passed on, there is little certainty that it will make an appreciable impact on the wider economy. It certainly isn’t arresting the slides in housing markets anywhere.

    It looks like this crisis might need deployment of Keynesian tools to get through it, in the big economies at least. Both the US and UK are trending that way.

  • Mack

    Malcom – Via a discussion on the propertypin

    “The funding profile of the society has weakened in recent years with
    average deposits as a percentage of average total funding reducing to 53%
    at end-June 2008 from 60% at end-2004”

    So presumably 47% of funding is via the wholesale market, which I presume would be Euribor rather that Libor (but maybe not). Unfortunately there is no link for the original article.

    They may be more customer friendly in terms of the spread offered, but were the worst offenders in the market in terms of salary multiples. Loose lending practises push up the unit cost of housing for everyone. Like standing up in the cinema, ultimately no one gets a better view, but everyone ends up standing. I guess maybe they thought that they would offer more competitive rates but make up the difference in the Euro volume of their loan book.
    Certainly, I think they did play an important role in pushing up the price of FTB properties. They compete in a different niche to the other banks, lending extreme levels of credit (in my personal case anyhow) to those desperate to get onto the ladder. Whether they will still think this is a good business model going forward remains to be seen.

  • Mack @ 12:42 AM:

    Ouch! thanks for the correction on Euribor/Libor: I shouldn’t have commented while well into the second bottle.

    Am I right in jumping to the conclusion that EBS are performing some sort of sleight-of-hand if they are offering mortgages — to members only — at about 0.3% above six-month Euribor? In other words, as in the UK, there’s a two-tier system evolving: new borrowers beware and be-beggared.

    The other story on that propertypin page (Moody’s downgrade of EBS) was telling. Thanks also for that link: I’m not keeping up with the play.

  • Mack

    Malcom – There are probably multiple slieghts of hand, and they may differ bank by bank. I’m sceptical that banks will pass on the base rate cuts in full – they have been aware that the cuts in the base rate are coming & that they will experience political pressure to pass them on. They’ve been bleeding over the last year – losing money hand over fist on trackers, as some of the more competitive trackers in the niave days of the property bubble where as low as 60bps over the base rate.

    The margin over Euribor is their profit on wholesale lending(anything below that and they may be losing money).

    In EBS’ case, because they’re not passing on the cut to BTLers – if BTL made up 50% (not saying it does, just for ease of example) and OO the other 50% then they’d in fact only be passing on 0.25% of the cut(it will be less than the full 0.5% in reality). But yet they announce they are passing on the cut in full.

    If they are not restricting access to their low rates to the best quality new borrowers (by only approving good LTV loans) then they are fools…

  • Mack

    Actually, thinking about that – it may be a smart move (temporarily making STV rates highly attractive). The banks need to get _existing_ customers of trackers. On the STVs they can raise rates as they wish (and most have been doing so). There have been reports on the ‘pin of customers recieving letters from their banks promising them a great deal to remortgage of the trackers.
    (It’s surely impossible for them to get a better deal, than the current one the banks are obligated to subsidise).