A DALKEY reader, Mr O'R, is buying a house. His problem is one shared by thousands of other home buyers - from which lender should he buy his mortgage. Unlike many potential borrowers, he has gone to considerable lengths to secure the most competitive loan available.
"I drew up a list criteria," he writes, "one criterion was to try to establish the most competitive institutions in terms of their interest rates over a period of time. I used some back copies of The Irish Times Property section to establish the rates of a few institutions (AIB, Bank of Ireland, EBS and National Irish Bank) for a variety of variable and fixed interest rate mortgages over a period of time in an attempt to see whether any were consistently competitive. My conclusion was that there did not seem to be any consistency. At a particular period one could be very competitive and then along comes a rate increase and the attractiveness of this institution slips.
"Obviously one cannot predict the future action of the institutions but I would be interested to know if any conclusions can be drawn from the exercise I tried to perform.
Mr O'R compared the rates of the four named lenders over four dates: April 6th, April 20th, May 15th and May 29th. He compared their interest rates and pound per thousand costs for variable, one, two and three year fixed loans. One of his main conclusions was that while EBS offered cheapest variable rates, this was not necessarily the case with fixed rates. AIB tended to be the most expensive lender followed by NIB and Bank of Ireland. Again, greater inconsistency was experienced when it came to fixed rate loans.
We asked Richard Eberle of the independent, feebased mortgage brokers, REA Mortgage Services' to look at our reader's research and comment on the issues he raised:
"As background, I'd first like to say that the business of Irish mortgage lenders is to attract cheap deposits from their branch network and to lend this money to homebuyers at a profit. The amount of profit depends on (a) the interest margin (calculated as the difference between the mortgage interest charged and the interest paid to depositors). (b) the cost of administering the mortgage and (c) the losses attributed to borrowers who do not repay their loans.
"Banks are public institutions that must pay dividends to their shareholders," he continues. Their need to pay dividends implies that these institutions must make a larger profit than a similarly sized mortgage lender that does not have shareholders. Building societies generally are owned by their members and are not obligated to pay dividends. This means they should be satisfied with a lower profit margin than the banks. However, there has been significant evidence that building society profit margins are far in excess of what is required to fund future growth.
"To further confuse matters some building societies are owned by public companies (ICS is owned by Bank of Ireland) and is therefore required to contribute higher profits that are in turn paid to shareholders. A study we did in January of this year compared the profit margins of Irish, British and American mortgage lenders and concluded that Irish lenders are overcharging by £60 to £80 million per annum".
"Your reader's worksheet demonstrates how mortgage lenders with a higher variable rate (AIB and Bank of Ireland) offer new customers a more competitive quotation for two or three year fixed rate loans. After the fixed period expires the customer usually reverts to the standard variable rate. Again, his worksheet shows how a customer might be led to believe he of she is getting a cheaper deal from the banks and may be saving money for two years but end up paying over the top for the next 18 years.
"Currently, interest rates for mortgages are set at the whim of the lenders and are not linked to any specific index. Further, it is in the interests of Irish banks and building societies to make it confusing for potential borrowers to compare the cost of a mortgage between different lenders.
"As a result, no lender currently offers a price guarantee on mortgages, so that the customer with the cheapest mortgage today will continue to have the cheapest mortgage in the future. Lenders use different (and in some cases, unfair) methods of calculating interest repayments so that two lenders with identical mortgage terms and interest rates could have two different repayments each month. Finally, no lender will link the interest rate charged to a specific index, such as the three month DIBOR (Dublin InterBank Overnight Rate).
"Unfortunately there is no way for Mr O'R to determine if the lender with today's best rate will continue to offer the most competitive rate in the future," says Mr Eberle. "REA Mortgage Services has called on Irish lenders to link the pricing of mortgage loans to a clearly identifiable index so that consumers will have some way of evaluating the future competitiveness of the pricing of mortgage loans."
