Q&A Q: I am looking to take out a mortgage as a first-time buyer. I realise the environment is not very good just now for going to the bank but, as I earn a good salary and can benefit from the falling price of property, I thought I would be able to get a mortgage reasonably easily.
It has been anything but. Some banks just seem not to want to lend money at all and others are making it very difficult - not just getting a loan but even explaining to customers what their interest rates are.
First Active has been a nightmare. I spent six hours trying to get someone to explain to me why new customers are being charged a higher rate than people who already have a mortgage, and I still don't understand. As far as I can see, First Active has passed on the ECB rate cut to existing customers but is trying to charge new customers the old, higher rate.
Can lenders charge a higher variable rate to new customers than they do to existing borrowers?
- JP, Dublin
A:Having spent nearly two weeks pursuing your query and receiving what could only be described as, at times, laughable responses, I think you probably made the right decision in giving up after six hours. In fact, this matter has now dragged on so long that the European Central Bank has since announced a further cut in interest rates.
On the broader issue, the absolute reluctance of Irish financial institutions to lend money is a matter of growing concern. The very people who just over a year ago were lending in the most irresponsible manner now appear to have swung to the other extreme.
Despite the presence of a Government guarantee, there is a prevailing view that in a declining economy, even today's sound customer could become tomorrow's bad debt statistic and, in those circumstances, the best option is simply to close up shop.
I have spoken to people working at various levels in all our major banks and this is a common theme. While banks may be deciding to close their books for this year, someone is going to have to start lending in early 2009 or small businesses as well as the property market will become paralysed.
Getting back to First Active, it is noteworthy that it was the first of the lenders to offer a general 100 per cent mortgage back in 2005.
Following your query I went to a spokesman for the former building society and asked why new mortgage applicants should be asked to pay a higher variable mortgage rate than existing borrowers. He told me this was because existing customers were on a "standard variable rate" while new ones, like yourself, would be on a "flexible variable rate".
But what's the difference, I asked? I looked on the website and the flexible variable rate product described had identical features to what would generally be termed a standard variable rate product.
Again, First Active returned. Apparently, they had it wrong the first time and any customers on the flexible variable rate mortgage would have got the half percentage point cut in rates from November 1st.
It now emerged that there was no difference between a standard variable rate mortgage and flexible variable rate one - except that First Active had phased out the former back in 2006 when tracker mortgages were all the rage.
They decided to reintroduce it last September with the more consumer-friendly "flexible" tag when they withdrew trackers which had become prohibitively expensive for the banks.
"New mortgages issued on the flexible variable rate product since its introduction have benefited from the 0.5 per cent decrease in rate," I was assured.
Well why then, I wondered, did the First Active website state that the rate for the flexible variable rate stand at 6.1 per cent APR for those borrowers with a loan to value of less than 80 per cent, and 6.2 per cent APR for those with a higher loan to value . . . and that those rates had been unchanged since the end of September? That was before the initial ECB half-point rate cut in concert with the US Federal Reserve and the Bank of England. And on October 9th, the day after the ECB rate cut, First Active issued a media statement saying it was passing on the rate cut in full from November 1st.
Finally, two days ago, First Active conceded that it was only people who already had a First Active mortgage that would benefit from the cut. "Any customer with a FVR [flexible variable rate] mortgage that has drawn down since end September . . . has had the rate reduction of 0.50% passed on. There has been no reduction in the FVR pricing for new applications - i.e. it remains . . . as per our website."
So there it is. After all the confabulation and spin, the bank is indeed discriminating against new mortgage customers. Despite a generalised media statement that it was passing on ECB rate cuts to consumers, it was doing so only selectively. Those most in need - first-time buyers looking for mortgages in the current turmoil - will pay half a percentage point extra for their loan.
Can they do it? There's nothing to stop them really - apart from enough customers simply shunning the bank. It's not as if First Active's variable rate is a market leader; it most certainly isn't.
Until very recently, new customers were being targeted with discounted rates that saw them pay less than existing borrowers as lenders battled for market share in the property boom. That, of course, was a sore point for loyal existing borrowers. Now the boot is on the other foot. It's perfectly legal and is simply a signal that the institution is more concerned with taking care of its existing business than in chasing new mortgage custom.
As you know, the ECB has since cut rates again by a further half point. First Active, like its peers, has quickly come out to state it will pass on the rate cut to mortgage customers in the coming weeks. However, the advertised rates for the flexible variable mortgage on their website have yet to change. It will be interesting to see if new customers will again be expected to subsidise those with existing loans.
Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
