Advisors.ie

This article originally appeared in the Sunday Business Post on the 7th of July 2015

It seems to be a fait accompli that the banks will drop mortgage rates because the Minister of Finance told them to do so. Thus far talk of any pitfalls are being avoided in the belief that subsidising a certain category of borrower serves a better common good.

The first thing we must do is break this down a little. There are over 300,000 people with Standard Variable Rates (SVR’s), but they are really three very different cohorts.

The first is made up of old loans, they have low balances and were taken out in the 90’s, the second is newer loans that were taken out when SVR’s were already high. This is best demonstrated by the fact that in some banks that the ‘average’ SVR loan has a balance of less than €75,000 that tells us (because of how averages work) that significant numbers have loan balances far below that figure.

The third group do warrant some empathy, they are the ones who took out boom time mortgages using variable rates so they have neither the low loan balance or the low cost tracker that was common in that time, but there was never an effort to identify this specific group and that is a missed opportunity for targeted policy.

That Minister Noonan got involved at all was in direct contravention of his own written agreement with the banks which were penned back in March of 2012.

You can find these documents with a simple internet search, they have the same title ‘Relationship Framework Specified by the Minister of Finance’ and then various bank names. In this document – which was his doing, not the banks – the minister agrees that “The Minister will ensure that the investment in the Bank is managed on a commercial basis and will not intervene in day-to-day management decisions of the Bank (including with respect to pricing and lending decisions)”.

It’s worth noting that by his own doctrine, that there would be no intervention on pricing, and yet the media reported that he was bringing in banks to ‘force’ them to drop their rates, a headline which was never retracted or challenged by the Minister or the Department of Finance.

Another point that was covered in this column last November was that a 25 basis point drop in rates in the likes of AIB costs the taxpayer about €400,000,000 in future lost profits. That question, or perhaps more accurately ‘the question of how will that profit be replaced’ is seldom asked.

Nor do we often hear about the fact that part of the European Commission conditions of state aid was that the banks reach a net interest margin of 2%. There is only a certain number of ways this can be achieved, higher rates (and not just on mortgages, but on all interest charging accounts) has to be part of it.

Thankfully in recent days this was again mentioned by Patrick Honohan in front of an Oireachtas committee.

As was his remark about the delayed manner in which we are dealing with non-performing loans. Ireland now has two national distinctions, the first is the actual size of our mortgage debt problem, the second, and less distinguished, is how long we have allowed it to fester with virtually no resolution.

If this country was anywhere else on the planet this entire conversation would be taking place in past tense.

Another issue is that for many people talking about an interest rate is like missing a vital part of the conversation. If I informed you that huge swathes of Irish children are illiterate it might worry you, if I went on to say that they are all below age three it would matter little.

The ‘weight’ of the debt matters, not just the ‘rate’ (interest rate) of it. A person who bought a house during the boom with €400,000 mortgage on a tracker rate of ECB plus 1% is paying about €1,500 a month.

A ‘ripped off’ buyer last year who used a €250,000 mortgage on an SVR of 4.3% is paying €1,361 which is still cheaper on a cash flow basis. Cash flow matters more than solvency, something that many people in negative equity have realised.

Why? Because you can be technically insolvent but liquid and survive. I have heard this personally many times ‘Oh, I’m in negative equity and [insert depressing comment here]’. When asked ‘do you plan to move’ the person often says ‘no’, when asked if it would cost more to rent the same house they often answer ‘yes’.

These answers demonstrate the point that picking an arbitrary measure (like our illiterate children) misses many of the important points that create qualified opinion. It would bode well to seek targeted solutions for those most in need of help, because clearly, picking up the phone to call your bank and get a cheaper rate than the prevailing SVR (as you currently can with any of them) is just too much to ask.