BANK CHARGES:Mortgage rates have already increased and now many expect bank charges to follow suit
ARE THE days of low-cost banking at an end? For years, consumers have benefited from aggressive price wars in the banking market as institutions sought to boost their market share by undercutting each other.
There was free everyday banking, low-cost mortgages and attractive deposit rates but now, as banks struggle to stay afloat, the pressure on them to increase their margins has intensified so their customers are set to lose out.
Already, the main mortgage providers have hiked up their variable rates while expectations are that banks will now follow suit with similar price increases across their broader range of banking products.
Ciaran Callaghan, a banking analyst with NCB Stockbrokers, says we’re now seeing a reversal of what went on during the boom, when banks were chasing volume based on price. “Now banks will focus a bit more on recouping some of their losses from customers right across the board,” he says.
“It’s bad news for good customers,” says Ronan Coburn, a forensic accountant and banking consultant. “The only people banks can rely on to fill up their coffers are good customers.”
Mortgage products have been the first to be pushed upwards and variable rates have already increased by as much as 0.6 per cent, and further hikes are on the way. For Coburn, customers with tracker mortgages should not “trade that position for love or money” and advises those fortunate mortgage holders to be aware that their lender might try to encourage them out of this and onto a variable rate, given how they are now making a loss on trackers.
And consumers should be warned that the banks are “only warming up”, says Coburn. Given that the retail market was recently described as “dysfunctional” by one banking executive, due to the fact that banks are lending money at 2 per cent, while paying 3 per cent out on deposits, this change is likely to happen soon.
To date, deposit rates have been artificially propped up by the banks’ need to reduce their loan-to-deposit ratios, which meant they have been focused on getting as many deposits as they can. Of course, the easiest way to do this is to offer the best rates, which is why the beleaguered Anglo Irish Bank is a market leader.
But the need to do this on an economical basis is becoming more important. Recently, Investec cut its 12-month fixed-rate to 3 per cent, and Callaghan says that when the other lead players lower rates, the “mass market will follow suit”. Moreover, when interest rates go up, which may happen next year, he predicts that banks won’t pass on any increases to savers.
And where once consumers could earn interest of more than 7 per cent on their current account balances through providers such as Halifax, those days are now gone. The best offer on the market comes from Permanent TSB, which pays 2 per cent on balances provided that the account is funded with a minimum of €1,500 every month.
The departure of full-service banking operators, such as Halifax/Bank of Scotland and Postbank, from the market is also bad news for consumers as reduced competition means higher prices. “The real price competitor is on the way out,” says Coburn, referring to Halifax/Bank of Scotland. “We have them to thank for setting the pace by introducing tracker mortgages, and compelling other mortgage providers to reduce rates and waive fees.”
For the 200,000 consumers now looking to switch providers, they will find that for the moment “free banking” is still available from the five main players in the current account market, which means that there is no charge for everyday banking services such as ATM withdrawals and direct debits.
However, according to Coburn, “free banking is gradually being eroded, with new conditions attached all the time”. Most banks impose restrictions on the eligibility of free banking.
For example, at AIB to qualify you need to make a purchase using your AIB debit card and use AIB phone and internet banking to make a debit transaction every quarter, while Bank of Ireland requires that you keep a minimum credit balance of €500.
Moreover, customers are discovering that the term “free” doesn’t apply to all services. As Callaghan says: “Banks are increasing charges on current accounts for one-off transactions.” If, for example, you need a duplicate bank statement, then you can be expected to pay €4 per page at National Irish Bank; €3.81 for the first page and €2.54 for the second page at Ulster Bank; and €2.54 per page at AIB.
You can also expect to pay for other services, such as replacing a lost or stolen card at banks such as National Irish Bank, which has a levy of €6 for replacing cards and €1.25 for a replacement PIN number, while Bank of Ireland charges €5.90 for a new card.
Although interest rates remain at historically low levels in Europe, there is still upward pressure on rates across the spectrum of Irish lending products, as banks look to boost their margins.
When it comes to personal loans, the average interest rate has risen to over 13 per cent for small loans, while Bank of Ireland recently announced that the cost of its term loans will increase from 12.4 to 13.5 per cent.
Overdraft rates are also on the rise, and most dangerously, so is the surcharge rate, which applies on any borrowings exceeding the agreed limit on the account. AIB, for example, charges a total overdraft rate of almost 27 per cent (14.79 per cent plus 12 per cent), while Permanent TSB imposes a charge of 25.6 per cent (13.6 per cent plus 12 per cent), and Bank of Ireland 22 per cent (14.8 per cent plus 7.2 per cent).
If you have short-term borrowing needs, you could consider Permanent TSB, which is offering 0 per cent on its overdraft for the first three months on amounts up to €10,000. At the end of this period however, the rate returns to the bank’s standard rate of 14.2 per cent, one of the higher rates on the market.
If you have considerable credit card debt and are looking for an interest reprieve, it’s now time to act, as banks are clamping down on introductory interest-free periods. Where once options abounded now, through the withdrawal of banks such as Halifax and Postbank, and the pulling back from such services by others such as Bank of Ireland, only a few credit card providers offer such introductory offers. Both EBS and MBNA offer 0 per cent for the first 10 months, while Permanent TSB and Tesco restrict it to six months.
However, you will still need to read the small print. Tesco, for example, has introduced a 2 per cent fee on all balance transfers made during the first four months from account opening, while transfers are also restricted to 95 per cent of the credit limit.
FIVE WAYS TO CUT BANK COSTS
1Keep your account in the black: With average overdraft rates running at about 14 per cent, don't spend more than what's in your account
2Looking for a personal loan? Opting for Ulster Bank rather than Bank of Ireland could save you €879 in interest (based on €22,000 borrowed over five years)
3Get free banking: If there are restrictions on your account make sure you comply with them to qualify for free day-to-day banking services
4Switch to 0 per cent now: if you have credit card debt, switch to a provider which offers a 0 per cent introductory offer now before they all pull back such offers
5Don't give up your tracker: Repayments on a €300,000 mortgage over 30 years will cost you €231 less a month if you stick to a tracker (ECB rate plus 0.75 per cent) compared to a standard variable rate of 3.23 per cent
