SVR’s: Comparing apples to oranges is bananas

The ongoing meme of standard variable rates being a ‘rip off’ has recently lead to a new bill being proposed by Senator Feargal Quinn. This is the most recent brainwave since the ‘tax banks to make them cut rates‘ idea.

Once again we see the politicisation of credit pricing which is avoiding many of the contingent facts on the topic which analytically is an error.

My old statistics lecturer used to say ‘comparing apples to oranges is banana’s’ and she was right, to compare two things they need more ‘likeness’ than the fact that both things happen to exist.

Here is a small list of things that occur in other jurisdictions that aren’t being mentioned.

1. Arrangement fees: Many jurisdictions (even around Europe) have arrangement fees factored into the loan, often this is 1% that the borrower pays the financial institution for setting the loan up. This reduces the need to amortize the cost of procurement and in doing so equates to a lower lifetime rate on the loan. The reason that you can’t bet on this being a margin that will be captured for the duration of the loan is that loans don’t last as long as they are taken out for… almost ever. So lenders only have a window of c. 7 years to get this back before facing very serious refinance risk (that the customer goes elsewhere).

2. Looking for the Central Bank to ‘set prices’ is not only outside of the Central Bank’s remit, but it is also a responsibility they don’t want, giving them this power will be an error, it’s like giving Ghandi the power of Superman. Their way of doing things uses force for issues of compliance, not pricing.

3. The National Consumer Agency should be lobbied before the Central Bank. This is because their mandate is in the consumer space now and has been since the adoption of the Central Bank reform Act 2010. Equally, part of their remit (the NCA) is to “encourage assertive consumer behaviour so as to foster greater competitiveness in the market place“. Thus far they have not been saying ‘switch lenders’ and save money – which people should do because that is what works.

4. Rates are falling anyway. This is particularly evident given the upside down pricing of fixed rates to variables. It’s true… We said it… Then the Central Bank proved it using their own empirical evidence, see their recent release on retail interest rates, the mortgage rate table shows it.

5. Other countries have favourable taxation treatment on mortgage funding, in Ireland we don’t. In Germany there are low/no tax options for funding lending on housing, not too far away from how the muni-bond market in the USA works. In Ireland we don’t have this, it means that very low cost long term funding has to come from deposits which are high here, or from other banks who don’t relish the thought of lending to Irish banks. This again pushes up prices.

6. Our deposit rates are off the chart (compared to Europe). Nobody is lobbying to see deposit rates slashed to zero, no, because that would make sense, rather we are a ‘cake and eat it’ society. So in Europe where you’ll be offered zero to half a percent (see France here). There are also state savings schemes in France that are attractive for amounts up to c. €22,000 but in general, we over pay for deposits, again, this is a cost that has to be considered.

7. No new banks have come here… If we have such desirable rates which grant windfall gains why are retail banks not falling over themselves to lend here? It’s because our loans are in practice close to non-recourse with tenancy rights stitched in. This means the cost of recovery is very expensive. In lending you have four ‘life stages’, acquisition, management, review then pay-off/write off. Our last two, in an environment of high arrears are income killers and that means working capacity requires high staff numbers that are costly (given their job is to get the money the bank expected anyway).

8. Other countries don’t have 50% of their mortgage book on trackers, you can’t blame all variable ills on trackers obvious attractions, but you also can’t ignore them. If you took a blended margin rate across all lending it’s far lower than that which exists on variables alone (but this doesn’t appear in the papers for obvious reasons because it would take all the sexiness of the story away).

The ultimate issue in this debate is that we are comparing apples to oranges. The rates in Europe are not related to the rates in Ireland any more than they are to the rates in Turkey because we don’t have a common market (unlike much of the USA) and within the EMU there is too much local variation to allow reasonable comparison.

The good news is that rates will be coming down anyway, the bad news is that everybody campaigning for something that will be happening anyway will be jumping up and down shouting ‘victory’, which is like demanding a new dawn then partying when the day after arrives…


  1. Hi Karl,
    Quinn says that this would only apply to ‘existing banks and for a three year period’. Is this a way of encouraging new banks to enter the market? Or what am I missing here? Thanks for the great article. Aidan

    • Karl Deeter

      My starting point is that all things ‘temporary’ often become permanent. Look no further than the ‘temporary’ income and health levy. They did ‘go’ but they became USC (just add them together and you get the USC rate) which doesn’t go away. Doing this for three years would actually discourage new entrants because they won’t want to enter a market that has price fixing on the way in. Imagine you are a lender and you are thinking of opening your business here and charging 3.8% at which you’ll make some good money and cover your entry costs. Then you are told you ‘have to’ charge 3.2%? What will you do? Stay out… Often good intentions come with unintended consequences that you can’t predict, but in this case it’s obvious from the outset.

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