Irish Mortgage Brokers Blog

There is increased coverage of mortgages in the press of late in particular in the area of fixing or staying on a variable, below are the best rates available on the market by class of product.

Best Variable Rate with an LTV Restriction:   2.25%
Best Variable Rate with no LTV Restriction:   2.55%
Best 1yr Fixed Rate:   2.35%
Best 2yr Fixed Rate:   2.65%
Best 3yr Fixed Rate:   3.15%
Best 5yr Fixed Rate:   3.7%
Best 10yr Fixed Rate:  4.5%

In this video Paddy Hirsch talks about Bonds, Notes and Bills helping to break down how debt is described based on its tenure and also a little about how they work. This is worth watching twice if you have heard ‘Government Bonds’ mentioned in the past but didn’t really get what they were talking about.

There is concept in finance of a ‘risk free rate’, and normally that is seen as being the rate of return on money by a sovereign entity (in our case it’s Ireland), so in a rational market it should always be the case that anything with an implicit state guarantee should pay far less than those without it, because those without it have to reward investors by offering more in order to attract them.

Oddly, in Ireland the institutions implicitly backed by the state are actually paying over the odds, and in effect that means a transfer is occurring from tax-payer to depositor, in short, we are being ripped off when our sovereign guarantee is not factored into pricing.

For example: Anglo Irish Bank are paying 3.1% for a demand account, this means you can take your money out whenever you want, BOI, AIB, INBS, NIB and many others are paying a mere 0.1% meaning that Anglo are paying a full 300 basis points or 3% more than competitors who are not state owned (albeit they are partially state owned). Rabo are paying 2% so what we are seeing from a deposit account perspective is that Rabo are a better institution in terms reliability than our own state is.

What a joke…. But it’s not so funny really.

Then we have An Post, an implicit state guarantee and you can lodge up to €120,000 with them and earn a TAX FREE rate of 3.23%, normally you’d have DIRT which would take 25% away from any deposit gains, but in this case you don’t, so in order to earn the equivalent elsewhere you would have to be making 4.31%. Again, this is an example of paying way over the odds for funds, the state should in fact be offering well below market rate levels of interest because their return is guaranteed in a way that no other institution can copy.

Are you angry? Don’t be, just make sure that you buy An Post savings bonds and instead make some profit on the errors made from on high, as a financial adviser I can’t believe this continues and nobody is pointing it out, in the USA bond income from Municipal Bonds is tax free, so you always make a ‘tax equivalent yield’ in which you show how much you’d have to make on a taxable bond in order to generate the same income it is as follows:

R(te) = R(tf)/(1- t)

Where: R(te) = taxable equivalent yield for the investor
R(tf) = return on tax-free investment (usually a municipal bond)
t = investor’s marginal tax rate

Bond income is taxed at your own rate of tax, we’ll assume that you had a good year and are on the marginal rate of 41%, and see what kind of yield you would need from any other bond to earn 3.23% after tax.

R(te) = 3.23/(1-.41) = 5.47%

So if you were to go out and buy a corporate or sovereign bond you would need to be earning 5.47% in order to just match the offering by An Post, and you wouldn’t get a return like that which is backed by a sovereign guarantee! (exception is perhaps a Greek bond).

So why are we paying so far over the odds?

That’s a question, I certainly don’t have the answer.

The Examiner carried a story about the number of options available to borrowers in the present market and the fact that they have dropped over 50% since 2008.

In 2008 there were 380 different mortgages available on the market across all banks and all rate suites, today, that number rests at 179 meaning that at least 50% of the choice is gone. That is also reflective of the fact that so many lenders have exited the market. Below is a list of several who are no longer lending here.

Halifax
Fresh Mortgages
Springboard
Stepstone
Nua Homeloans
First Active
GE Money
Leeds

Many of these providers were in the non-prime/specialist/sub-prime category, however, a drop of 50% in choice doesn’t mean that there are no options left. Certainly tracker mortgages are a thing of the past as are Standard Variables (referring to new business for these products, existing clients will keep their existing product).

The other factor that makes this less spectacular is that many lenders replicate offerings, so when each lender pulled out, their two year fixed rate product being discontinued means that there were 8 less two year fixed products available, but it isn’t the case that the market leading 2yr fixed was necessarily with any bank that quit the market.

The idea that the more mortgages there are, the wider the choice is true in respect of their being more ports of call, but if you wanted baked beans does it matter whether the shop you go to stocks 6 brands or 70 brands of the same thing? Mortgages are not rocket science, there are intricacies and nuances that a practitioner understands better than a day to day consumer but in terms of choice there are still plenty of options and navigating your way through them is perhaps made easier given that there are fewer choices, even if all of the players remained in the market tracker mortgages and standard variable mortgages would not be on offer, so it doesn’t mean that the consumer is definitely gouged when one or more banks stop lending or close up shop.

Banks deny that they are cherry-picking applications and brokers say otherwise. What I can say is that we are going through a credit adjustment where there just isn’t the appetite for lending that used to exist. This is natural, it happened (for instance) in Finland in the 90’s, it took a decade for lending to reach bubble levels again. As well as this, when you have a rapid build up of borrowing, it is like people were reaching further and further into the future for greater amounts in order to spend in the present, that is a basic premise of lending, you give up future income streams in order to spend today and that applies to credit cards, personal loans, and mortgages as well. Finally, during a recession in which unemployment is rising, asset prices are dropping and many have taken wage cuts, appetite for high level financial obligations will be naturally surpressed.

So it is no surprise that annual lending for 2009 was only €8.1bn, that is broadly in line with our prediction set out in early January.

The question remains though, are lenders cherry-picking applicants? My opinion is ‘yes that is exactly what they are doing’, they have something with scarcity, mortgage credit, and this leaves them with two choices (remember: they don’t have endless amounts themselves), they either raise prices in order to weed out applications, or they pick only the very best applicants available and offer the line of credit to them.

The price hikes won’t come (yet), once assets are all gone over to NAMA two things will happen, mortgage rates will rise, and deposit rates will drop. So for now you can get good returns on deposit and good prices on mortgages. Anglo just passed €10bn over today, they didn’t operate in retail banking, so rates won’t move, but it means that the show is under-way and when the main street banks start to shift assets to NAMA it will be the starting point for those two trends to commence.

CNBC are looking at an issue that is arising in the USA whereby 2nd lien holders are looking for a side ransom in order to allow a short-sale to proceed.

Brian O’Donovan of TV3 looks at the implications of the closure of Halifax Bank in Ireland for the nation.

I can’t help but think that if Bank of Scotland had stuck to the broker channel that they wouldn’t have been in the mess they are in now, and there wouldn’t be 40 odd branches of Halifax closing (they wouldn’t exist), in my mind it is an example of how a large bank got it terribly wrong and ultimately failed to understand their customers.

Their distribution customers were brokers, and via brokers their end customers were Irish consumers, in the end they have alienated both of the groups they set out to serve.

Halifax, who were the retail side of Bank of Scotland Ireland, came about as a follow on from an expansion in the Irish market that was introduced and lead by mortgage brokers. In 2006 it was decided that a greater presence was warranted and they began creating a street presence via branches.

Entering a competitive and mature market with a high-cost/low-margin retail proposition is bound to have its problems. Bank of Scotland mistook the market signals they got from broker lead expansion as a genuine appetite for their entire offering (retail banking etc.), turning off the intermediary tap can be done overnight with ease,  I would wager that within the general population that almost nobody could state the time when BOSI essentially shut down the broker channel, it barely made news, and it didn’t cost the bank much to do. On the other hand when you want to shut down a retail channel it is a mess, lots of jobs are lost in the process, hence the current fiasco, affecting staff (job loss), customers (many will have to make alternative arrangements for credit cards/current accounts etc.), and intermediaries.

Yesterday on Drivetime I was making this point, because the other prime bank banks that stuck to their original intermediary distribution model (KBC) also shut off lending, and can now return to market armed with billions to lend. They didn’t go out and try to break into a well established retail market with low attrition rates.

The head-space of the Irish consumer when it comes to financial products is a strange phenomenon, ask anybody from any town around the country if they are angry with our banks and you’ll likely get a ‘yes’ response, but then ask them ‘have you done anything about it? Like moving your bank account to a different institution?’ and you’ll probably get a ‘God no! Sure I’ve been with the AIB for 20 years!’ or something to that effect, ultimately, Irish consumers, when it comes to retail banking are mainly all talk and no action. They will shop around for insurance, for mortgages and other financial products, but they don’t do the same for their current accounts and Halifax hadn’t bet on this. Sadly, people who did switch will likely return to the old banks and only further reinforce their hold on the Irish market.

While PTsb have had some success with current accounts, it has to be remembered, they are an incumbent with a long presence via the TSB, and for all the accounts they say they open, how many subsequently leave? The fact is that it is the younger generation who know no loyalty to their banks (this is a good thing in my opinion) but the older generation - where the real money rests - are not keen to change.

I feel awful for the people who work at Halifax, I have many friends there, people I know and respect, they have the same hopes and concerns as the rest of us, husbands, wives, children, and mortgages to pay, this will be a testing time as there are virtually no jobs to be had in the financial industry at present. I got several phone calls yesterday from some of them and its hard to stomach, especially as some of the talent there was induced away from jobs in other institutions that, if they had stayed, would still exist.

On the other hand, for Halifax in particular, I have almost no empathy, they went to great lengths to cannibalise their existing distribution via dual pricing in favour of branches and , hoping to circumvent it for higher returns and now that it has failed they have failed, they weren’t upset as brokerages closed and the effects of their decisions shattered the intermediary channel, so it is only right that in return we feel nothing for them, that is merely equal emotional recourse.

People will mourn the loss of competition, the fact is that it wasn’t operating competitively, they were operating at a loss, and loss isn’t competitive - its unhealthy. Halifax was literally buying in business on both mortgages and savings, they didn’t have huge levels of zero-rated funds swashing around in current accounts because they were paying high interest rates on current accounts and that funding approach is unsustainable.

There is also the issue that HM Treasury (and ultimately the UK taxpayer) had bailed out HBOS/Lloyds, and it would surely be unpalatable for the UK taxpayer to learn that a loss maker was being kept alive in a foreign jurisdiction? If we were to find out tomorrow that BOI was operating at full capacity in the UK at a loss would it not bring about similar pressure on them to close operations there?

Everything was in alignment against Halifax, even when they wanted to sell their branches and book nobody was interested, nor were any other institutions interested when they put themselves forward as being part of a ‘third force’, executives in at least one organisation said ‘they’d rather walk away’ than pair with them.

And thus it culminates in closure. Halifax were the first branch retail banking entrant to the Irish market in decades, perhaps we will have to wait several more before another entrant dares test the Irish retail banking waters.

There is an interesting situation that we are seeing much more of lately, where people in negative equity or negligible equity are deciding that because they cannot now move up the ladder (which was the point in their initial purchase - as a stepping stone to trading up), they will instead rent out their home and then rent a house in the area they actually want to live.

While this is a working solution to a person in negative equity seeking mobility it can result in a tax liability that many people are not aware of, this is how it occurs, the portion of mortgage payment that goes against the capital is actually taxable, and if it is paid to the bank it doesn’t mean you don’t have to pay tax on it.

The finance act in 2009 brought about a change whereby only 75% of mortgage interest can be offset against Case 5 rental income as an expense, and this further exacerbates the situation even for those who have interest only loans!

However, we’ll demonstrate the position a person would find themselves in if they had a mortgage of €260,000 over 25yrs (costing €1,230 per month) and they rented the property out for c. €1,100.

Clients have told us they have gone ahead and done this, but that they don’t mind losing out on the €130 per month in order to live where they really want to be, that is when we have to explain the rest of the implication to them!

For a start, if you rent out your property within the first five years (if you didn’t pay stamp claiming First Time Buyer status) there can be a stamp duty clawback, but it doesn’t end there.

Within the €1,230 per month mortgage payment (TRS will no longer apply if you are renting the property out) there are two parts, €650 is interest and the remaining €580 is capital repayment. Only 75% of the €650 can be set off against the rent meaning that only €488 applies.

So your €1,100 rent minus €488 is the ‘profit’ you are deemed to have made which amounts to €612 per month and at c. 45%(ish) tax that means you’d have to pay Revenue €274 per month in tax on top of the €130 difference that it takes to make up the full payment.

This means that the monthly cost is actually around €400 (and this is made up of after tax income - so the gross cost is higher again- of course, we can advise people so that this doesn’t happen but often people don’t seek advice in advance and that means that even with our help they are facing a tax liability, for that reason we would hope that if you are considering this that you call first!

Other expenses that have to be considered are changing your home insurance to reflect that it isn’t a primary home any more, then there is the NPPR tax (non-principle private residence), as well as PRTB requirements.

If you have any questions call us, the main thing is to ensure that you don’t find yourself in this situation if you can’t sell your current home and want to move elsewhere!

The Financial Regulator recently brought out a new code of conduct for mortgage arrears, the full length eight page document is here.

The code applies to: all of the regulated mortgage lenders in the state (this includes the sub-prime lenders), as well as all mortgage lenders operating here via other EU states (eg: Leeds Building Soc.)

It applies to consumers only, and only in respect of their principle private residence in the state. The code should be treated as an extension of the Consumer Protection Code.

Scope: The code covers finance for primary homes, lenders must adopt flexible procedures that aim to assist the borrower as far as possible. It sets out what the lenders must do in an arrears case but allows repossession where the code is not appropriate (fraud, breach of contract, abandonment). It doesn’t relieve the borrower from their duties to repay

Legal Background: S117 of the Central Bank Act 1989

Avoiding an arrears problem: Once arrears arise the lender must promptly communicate with the borrower to establish grounds for same.

Handling an arrears problem: The lender must make every effort in correspondence by telephone, mail, or meeting to find a resolution. A plan for clearing the arrears should be made which is in the interest of both parties, all viable options must be considered. If a third payment is missed the lender has the right to issue a formal demand. At this stage the borrower must have been advised in writing of

1. The total amount of arrears
2. Any excess interest (as a rate or amount) that may continue to be charged and the basis of how it is charged, any charges payable and the basis of them.
3. Advice regarding the consequences of failing to respond - namely the risk of legal proceedings with an estimate of costs to the borrower of same.

If arrears persis the lenders has the right to enforce the agreement (repossess the property) however, they must wait 12 months from the time arrears first arose before applying to the courts (civil bill). The lender must notify the borrower when it commences legal action for repossession.

Addressing an arrears problem: Lenders can distinguish between those ‘unable’ to pay, and those who are ‘unwilling’ to pay. they must examine each case on its individual merits. Overall indebtedness must be considered. They should look into one or more of the following solutions -

1. An arrangement where the monthly payment is changed in order to address the arrears
2. Deferring payment of all or part of the instalment for a period if appropriate
3. Extending the term of the mortgage
4. Changing the type of mortgage if it results in reduced payments.
5. Capitalising the arrears and interest if it results in repayment capacity and if sufficient equity exists.

The borrower must be advised to take appropriate independent advice. Lenders must give borrowers clear explanations in writing along with costs/charges that may arise, they must continue to monitor the situation, the borrower must have a relevant contact in the lenders firm.

Where appropriate the lender should refer the borrower to MABS, at the borrowers request and with their consent the lender can liase with a nominated third party. the borrower should be made aware of all alternatives, trading down, voluntary sale, or refinancing elsewhere.

Repossession proceedings: A lender must exhaust every alternative before seeking reposseession, an abscence of engagement is considered grounds for this. It may also come about via voluntary possession, by the borrower notifying the lender, or via court order.

Even in a repossession case the lender must maintain contact with the borrower or their nominated representative. If agreement can be made the lender must enter talks and put a hold on proceedings if an agreed regular payment is maintained.

The lender let the borrower know that no matter how the property is repossessed and disposed of, the borrower will remain liable for the outstanding debt, including any accrued interest, charges, legal, selling and other related costs, if this is the case.

Retention and Production of Documents: A lender must keep and maintain adequate records of all the steps taken, and all of the considerations and assessments required by this Code, and must produce all such records to the Financial Regulator upon request.