National Irish Bank (NIB) has made an aggressive bid to convince homeowners to switch their mortgages to its books by slashing the interest rates on its loans.
NIB made what could be the first strike in a mortgage market price war yesterday by introducing a mortgage with a margin ranging from 0.5 to 0.59 percentage points over the European Central Bank (ECB) base rate.
Rival lenders had a bad day on the Irish Stock Exchange yesterday, as traders said the financial sector was "spooked" by NIB's move.
NIB, which was sold by National Australia Bank to Danish financial institution Danske Bank last year, has introduced a new mortgage pricing model to the Irish market where the interest rate charged is linked to the value of the property.
Under the LTV (loan-to-value) mortgage, a margin of 0.5 points over the ECB base rate applies to the first portion of the loan up to 50 per cent of the property value. A margin of 0.6 points is applied to the next portion of the loan, up to 60 per cent of the property value, while a margin of 0.8 per cent is applied to the final portion of the loan, up to 80 per cent of the property value.
The loan is only available to borrowers where the mortgage does not exceed 80 per cent of the value of the property, which excludes most first-time buyers.
But thanks to the property boom, many homeowners have seen the proportion of their loan in relation to the value of their property fall. Cheaper loans are already available to people with lower LTV mortgages, making it possible for these borrowers to save thousands of euro in interest payments over the life of the loan.
NIB's pricing structure means the margin on its tracker variable and fixed-rate loans is 0.5-0.59 percentage points, which is far lower than the margins charged by other lenders.
Based on the current ECB base rate of 3.25 per cent, tracker mortgage customers will be charged rates as low as 3.75 per cent.
NIB chief executive Andrew Healy said the mortgage was a "call to action" for all mortgage holders, particularly those on standard variable rates, to find out what their mortgage is costing them.
"It's a bit like having a mortgage on a four-bedroom house. After a number of years, you effectively own three of the four bedrooms, but you are paying an interest rate that suggests you own just a few door handles."
The bank will pay the legal costs for switching.
Shares in AIB were down 2.3 per cent and Irish Life & Permanent fell 1.2 per cent, while Bank of Ireland shares stayed flat.
Yesterday AIB decided to pass on just 0.1 of the ECB's recent quarter point rate hike to its standard variable rate customers in a further sign that there is pressure on lenders' margins.
Goodbody Stockbrokers said it expected loan margins to decline by a third by the end of 2008 and that the gap between the rates charged to first-time buyers with high LTV mortgages and homeowners with low LTV mortgages would widen.
Mortgage broker Simply Mortgages welcomed NIB's move and said it should result in other lenders reducing their rates.
But the president of the Independent Mortgage Advisers Federation (Imaf), Michael Dowling, said he did not envisage that the NIB product would make as big a splash as it would if it was offered by the larger banks.
"I applaud NIB, but there would be a standing ovation if it was the likes of AIB or Bank of Ireland that was doing this."
