Why is loyalty punished when it comes to Irish mortgages?

"Never waste a good crisis" is the adage, and it seems Bank of Ireland has taken this to heart.

Last March it closed 101 branches “temporarily” on the back of the arrival of Covid-19, citing issues such as difficulties in social distancing. Some 12 months on, it seems those closures had less to do with the pandemic than with the bank’s slimmed-down business model. The pandemic, it seems, simply afforded the bank the opportunity of trying out a trial winding-up of these branches. And now, for many, the temporary has become permanent.

But while there is understandable anger at this move, particularly in rural communities that may now find themselves without any bank in their localities, it shouldn’t detract from some of the bigger issues facing Irish bank customers.

Such as mortgage rates.

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As report after report from the Central Bank shows, Irish homeowners are paying more than double the interest their European counterparts are paying for home loans. Ireland had the second most expensive mortgage rates in the euro zone last December, behind only Greece.

Figures show that, over 30 years, an Irish homeowner will end up paying a staggering €80,000 more on a €300,000 mortgage than someone in Germany would, where rates average 1.35 per cent.

On the plus, the Irish mortgage market also differs from others in the range of incentives on offer, such as cashback offers, that can be used soften the blow of high rates. As Minister for Finance Paschal Donohoe outlined in the Dáil last week, these offers "reduce the effective Irish mortgage interest rate".

Cashback payments are now popular among many of the lenders in the Irish market

What he didn’t specify, however, was: (a) by how much they reduce the rate; or (b) that thousands of homeowners remain excluded from these deals.

And he's not the only regulator to shy away from criticising such deals. Back in 2019 the governor of the Central Bank, Gabriel Makhlouf, told the Oireachtas committee on finance that it wasn't cashbacks, per se, that were a problem, but rather ensuring that "the terms on which cashback is offered are clear and transparent because consumers rarely get anything for free".

Under the Central Bank consumer protection code, lenders must set out the total cost of the mortgage if a borrower avails of the incentive, and the cost if they do not.

But is this really enough? Especially when you consider that the costs of both are the same, as it is the existing customers who are losing out, not the new ones.

Cashback payments

Cashback payments are now popular among many of the lenders in the Irish market. They were kicked off by Bank of Ireland in 2015, and that bank is still one of the biggest players in this area.

It pays you 2 per cent of your mortgage (so €4,000 on a €200,000 loan) once you draw it down, either as a first-time buyer or switcher, and a further 1 per cent (€2,000) after five years, provided you stay with the bank (one of the few instances where loyalty pays, perhaps).

AIB-owned EBS offers a similar approach, with up to 3 per cent back, while KBC offers €1,500 to first-time buyers and €3,000 to switchers, and Permanent TSB pays 2 per cent back on drawdown. AIB has no incentive for first-time buyers but will pay switchers €2,000.

While cashback offers have been criticised for costing homeowners more in the long-term – banks should compete on interest rates alone, many have argued – there’s also an issue around just who qualifies for them.

If you’re buying a home for the first time, or are switching to a new bank, you can benefit from the lump-sum payment from your lender when you draw down your mortgage. In other words, if you’re a “new” customer, you get a lump of money into your bank account.

But what about existing customers? Not only are they not getting the cash back, they are also paying rates over the odds.

Such incentives then, should be seen as a form of dual pricing, and one that discriminates against existing customers by rewarding new customers.

Highest rates

Take a Bank of Ireland customer who took out a mortgage with the bank before 2015. They are now paying some of the highest rates on the market, with a lowest fixed rate of 2.9 per cent. This compares poorly with the 1.95 per cent market leading rate on offer at Avant for those with a loan to value of less than 60 per cent, or 2.55 per cent with AIB on a three-year fixed (LTV>80%).

One could argue that the use of cashbacks in mortgage lending should be due some attention by the Central Bank

It’s a similar case at EBS, which – surprise, surprise, also offers the largest potential cashback, at 3 per cent.

While new customers may have benefited from cashback of €8,000 up front on a €400,000 mortgage, which may take some of the heat off these higher rates, existing customers have no such luck.

And the only way they can benefit from their lender, if they want to stay with that bank, is by first switching to another lender, and then later back to that original bank. So much for loyalty, when you have to go to all that time, money – and potential expense – just to be in same the position as “new” customers.

One could argue that the use of cashbacks in mortgage lending should be due some attention by the Central Bank, given there has been so much focus on dual pricing in the insurance sector.

So far that hasn’t been the case, however.

Mr Makhlouf has previously said the mortgage market is different to the insurance sector because it has “greater transparency and a greater ability for customers to switch providers”. It’s a puzzling remark in many respects, given that switching a car policy involves one phone call, while switching mortgages takes legal advice and a significant amount of paperwork.

Many people are also excluded from switching mortgage. Among the reasons are being in arrears, finding oneself on the pandemic unemployment payment, working reduced hours or working in what is deemed a Covid-risk business, and childcare costs.

And this is where relying on incentives such as cashbacks to offer some value to homeowners rather than simply bringing interest rates down is so objectionable.

Penalising those who can’t switch, or won’t switch, should not be encouraged.