Proposed Budget levy on financial institutions may persuade some to recover costs by not implementing full reduction, writes Siobhán Creaton, Irish Times Finance Correspondent.
Banks and building societies are expected to begin to reduce mortgage interest rates from today although it is unclear whether they will pass on the full 0.5 of a percentage point cut in European Central Bank rates to customers.
AIB, which currently offers the lowest variable interest rate, is expected to reduce its mortgage rates today.
If it were to cut rates by 0.5 of a percentage point, its standard variable mortgage rate would reduce from 4.25 per cent to 3.75 per cent. A 0.5 of a percentage point reduction in mortgage interest rates would yield significant savings for home-owners.
Anyone with a €100,000 mortgage could expect to monthly savings of up to €30.
The monthly repayments on a €150,000 mortgage should fall by €45 while for the cost of repaying a €200,000 mortgage would reduce by €60 a month.
IIB Bank yesterday cut the standard variable mortgage rate being offered to new customers by 0.5 of a percentage point to 4.2 per cent.
But it has not reduced the rate of interest being charged to existing customers following the ECB rate cut yesterday.
All of the financial institutions have said that they are reviewing interest rates and will be closely watching what their competitors do. In the past the banks have scrambled to be the first to announce a new low rate to attract new business but they appear to be more reticent this time around.
It is over a year since the last interest rate cut by the ECB and yesterday's move follows the surprise imposition of a levy on deposit takers by the Minister for Finance, Mr McCreevy.
The measure - announced in Wednesday's Budget, will collect €300 million over the next three years.
The institutions were yesterday calculating the impact of the levy on their business and customers have been left wondering whether the banks would try to recover some of this cost by raising bank charges or by swelling profit margins on their deposit and lending activities.
Any increase in bank charges has to be approved by the Director of Consumer Affairs, Ms Carmel Foley.
The institutions could, however, decide not to pass on the full ECB rate cut and recover some of the additional costs in this way.
The ECB cut its key rate from 3.25 per cent to 2.75 per cent.
All of the Irish financial institutions have been offering mortgage rates at between 1 and 1.5 per cent above that rate.
If they were to now cut by less than 0.5 of a percentage point this margin would widen.
The EBS building society said it was assessing its rates, looking at the impact of a rate reduction on both borrowers and savers.
Bank of Ireland and Irish Permanent both said they were reviewing their rates and expected to be making an announcement in the coming days.
The levy will disproportionately affect the various financial institutions, with First Active more severely hit, in terms of its total business.
Some sources have suggested the levy could make it more difficult for some of the institutions to compete with their bigger rivals.
Mortgage lending is the most competitive sector of financial services as all lenders have dramatically reduced their profit margins since the arrival of Bank of Scotland in the Republic in recent years.
