Discounts on variable and short-term fixed-rate mortgages create unfairness and make mortgages less transparent than they could be, a major review of the UK mortgage market has found.
The practice of offering special one-year discounts to lure new customers plays to a tendency of many borrowers to focus on the initial monthly payments on a mortgage and ignore the likely overall cost of borrowing over the life of the loan, according to the report.
Commissioned by the British Chancellor of the Exchequer, Mr Gordon Brown, the report has recommended that the UK regulator require that lenders make their full range of products available to all borrowers.
Distinguishing between customers on the basis of whether they are a first-time buyer, an existing customer or someone remortgaging from another lender creates a barrier to some borrowers getting better mortgages and can mean that taking the costly step of switching to another lender is the only way to get the best deals, said Prof David Miles, author of the report.
Here, the Irish Financial Services Regulatory Authority (IFSRA) said it would examine mortgage rates as part of its study on the passing on of European Central Bank (ECB) interest rate cuts to borrowers.
The Irish Mortgage Council was quick to respond to the UK report, arguing that its key recommendations were not relevant to the Irish market. The council said the rates of interest Irish financial institutions offered to new customers did not differ from those offered to existing customers to the same extent as they did in the UK.
"Lenders in the Irish market compete vigorously on the basis of standard variable rates, which are at extremely competitive levels," said the council.
Most recently, however, lenders have been competing for customers by undercutting rivals on their tracker mortgage rates.
Tracker mortgages guarantee that the interest rate will not be more than a set percentage above the ECB base rate.
Lenders' margins on tracker rates are lower than they are on standard variable rates and, as a result, many institutions, including Permanent TSB and Bank of Ireland, offer trackers to new customers only.
Earlier this month, EBS Building Society dropped its standard variable rate to 3.25 per cent, the cheapest in the market, and announced that a tracker mortgage at the same rate would be available to all customers.
Bank of Ireland, meanwhile, introduced a new range of tiered-rate trackers, but took the step of cutting its one-year variable discount for new customers at the same time.
EBS chief executive Mr Ted McGovern said the building society had decided to abandon the industry practice of offering lower initial mortgage rates to new customers. "New mortgage discounts and the practice of barring existing customers from availing of tracker mortgages has, we believe, caused resentment among people," he said.
Mortgage advisers are even more scathing about the practice of making existing borrowers subsidise the cheaper loans offered to new customers.
"I can't understand the mentality of Irish banks which reward non-loyal clients with discounted first-year rates at the expense of existing borrowers who are the very ones they should be looking after," said Mr John Lowe, managing director of Providence Finance Services.
He said existing borrowers who told their lenders they were moving their mortgage elsewhere might be offered the lower tracker rates. "But it's unfortunate that the banks only react when competition hits them in the face."
Lenders offering discount rates lure people onto their books, then rely on customer inertia to keep the business after the discount period ends.
For example, Permanent TSB offers a one-year discounted variable rate of 2.49 per cent to people borrowing less than 50 per cent of the property value, according to Mr Liam Ferguson of mortgage intermediary Ferguson & Associates.
"Someone who's not financially aware might look at the repayments they would have to make just based on that 2.49 per cent, but afterwards you fall back on to Permanent TSB's standard variable rate of 3.55 per cent," he said.
"Even if the person holds the mortgage for just five years, which would be the average shelf life of a mortgage, getting a rate of 2.49 per cent for one year and 3.55 per cent for the other four years is the equivalent of an average rate of 3.34 per cent.
"Whereas if they had ignored the discount and just gone for a tracker mortgage they could have got a better rate."
Other competitive variable rate discounts include First Active's six-month 2.53 per cent offer, which reverts to a standard variable rate of 3.53 per cent, and a one-year rate of 2.69 per cent at IIB Homeloans, which has a standard variable rate of 3.45 per cent.
Permanent TSB also has a one-year 2.69 per cent discounted variable rate for people borrowing more than 50 per cent of the property value.
"The lenders offering the best discounts are all lenders where the standard variable rates you fall back on at the end of the discount period are not particularly competitive," Mr Ferguson said.
With tracker mortgages, borrowers can more easily compare rates over the longer term, but these introductory discounts "very much muddy the waters", he added.
With around 50 separate variable rates on the market, plus a whole range of fixed-rate and discount fixed-rate loans, the mortgage market is getting more competitive, but harder to navigate.
"If some of these discounted rates were to disappear, it would be simpler for customers," Mr Ferguson said.
