BORROWERS ARE facing higher mortgage repayments after two of the State's top three mortgage lenders, Permanent TSB and Ulster Bank Group, raised their standard variable interest rates, passing on to customers the higher cost of funding in the volatile financial markets. SIMON CARSWELL, Finance Correspondent reports
Permanent TSB, Ulster Bank and its sister bank, First Active, increased their standard variable rates yesterday by between 0.2 per cent and 0.25 per cent, adding €40 a month to the cost of a €250,000 mortgage on a term of 30 years.
This has the same effect as a 0.25 per cent interest rate increase by the European Central Bank (ECB), which has not moved its benchmark rate from 4 per cent since June 2007.
The increases are a further signal the ECB rate no longer reflects the mounting cost of home loans to banks.
Permanent TSB is the State's biggest mortgage lender, controlling one-fifth of the market. Ulster Bank Group, which includes First Active, has a share of about 18 to 19 per cent of the mortgage market. Their interest rate increases reflect the escalating cost of wholesale money to the State's main banks, as the credit crunch has made banks reluctant to lend to each another amid concerns about mounting subprime-linked losses. This has driven up the cost of money in the financial markets, which dictates mortgage rates.
Permanent TSB is raising its standard variable rate for the second time this year, increasing it by 0.25 per cent to 5.69 per cent.
Ulster Bank is increasing its variable rate by 0.2 per cent to 5.79 per cent, while subsidiary First Active is increasing by the same margin to 5.89 per cent.
Michael Dowling, spokesman for the Independent Mortgage Advisers Federation, said the increases were "a wake-up call to any old-style customers who stayed on variable rates".
Permanent TSB announced last week it was raising its tracker mortgages, on which customers pay a margin over the ECB rate, for new borrowers from next month. It is raising the rate by 0.2-0.25 per cent in most cases and by 0.45 per cent in some. Ulster Bank, First Active and Bank of Scotland (Ireland) have also raised their tracker rates.
Lenders are amending mortgage products on an almost daily basis to cope with higher funding costs to prevent profit margins being eroded. They are also reducing the size of new mortgages to a lower percentage of the property's value.
Loan-to-value ratios on mortgages have fallen from 90-100 per cent of the property's value at the height of the boom in early 2007 to an average maximum of 80-90 per cent, depending on the property and the borrower's future earnings. This is forcing borrowers to pay sizeable cash deposits to secure mortgages.
Mortgage brokers, who sell about 55 per cent of Irish mortgages, are also being squeezed as lenders reduce their commissions.
Bank of Ireland and its subsidiary, ICS Building Society, were the latest lenders to reduce commissions, following similar moves by Permanent TSB, First Active and Bank of Scotland (Ireland).
Bank of Ireland is halving its broker commission to 0.5 per cent from June 1st, while ICS, which sells most of its mortgages through brokers, is reducing it from 1 per cent to a maximum of 0.65 per cent, depending on quantity sold.
"The changes are being announced due to higher borrowing costs arising from the changing funding environment," the bank said in a statement.
Funding costs have steadily risen since January as banks are reluctant to lend to each another, despite efforts by the ECB to ease the crisis by injecting cash into the banking system at discount rates.
The interbank euro borrowing rate for three-month money, the benchmark for most commercial lending across Europe, rose to a four-month high of 4.847 per cent yesterday, or 0.847 per cent above the ECB's benchmark rate.
This is substantially higher than the cost of bank funding before the credit crisis hit last August.