Did I hear that AIB has cut its mortgage interest rates again? Not exactly. But you may well have heard some talk of it. This week Allied Irish Banks' chief executive, David Duffy, appeared before the Oireachtas Committee on Finance, Public Expenditure and Reform, whose members seemed ready to tear strips off him for keeping the standard variable rate (SVR) that the bank charges more than 140,000 of its customers at 4.1 per cent – even though European Central Bank (ECB) base rates are almost zero.
And did they tear strips off him? They did not. Because Duffy did not get to be the head of the bank by being stupid and unprepared – unlike, dare we say it, some of those who have run banks here in the past. Duffy knew exactly what the committee was going to do, so before members had the chance to ask him any hard questions he gave big hints that he was planning a rate cut for that group of beleaguered customers.
Remind me again why they are beleaguered The average interest on an SVR mortgage today is 4.2 per cent, but the average on a tracker mortgage is just over 1 per cent. The average variable rate across the euro zone, meanwhile, is 2.47 per cent. But forget percentages: let's talk about cold hard cash. Someone with a €300,000 mortgage and an SVR mortgage is paying almost €650 a month more than someone with a tracker.
That sounds pretty beleaguered. Does this mean AIB is going to slash its rates? Hardly. Duffy said that if market conditions and the bank's costs of funding were to continue to improve over the next month or two, as is widely expected, then it would be able to cut its SVR. He didn't say how much the SVR could fall by, but, as the bank is offering fixed rates of 3.8 per cent, a general cut of at least 0.25 per cent is anticipated.
Hmm, that doesn't sound like a whole lot For every quarter of a percentage point a rate falls by, the monthly cost of servicing a €100,000 mortgage is reduced by about €15. This means the average SVR mortgage holder at AIB, with an outstanding loan of €300,000, could see monthly repayments fall by €45 – a saving of more than €500 a year.
So did the bank cave in to pressure from the Government, the Opposition and the media? Not at all. Rates were always going to come down. Some excitable media organisations were quick to claim a degree of credit for the hinted AIB move, Opposition parties were falling over themselves in the rush to release press releases claiming victory, and people in Government circles were quietly patting themselves on the back for leaking stories about increasing the levy on banks if a rate cut was not rolled out. The reality, however, is that the cut was always going to come.
Why? Because market conditions have made it inevitable. AIB's borrowing costs have fallen considerably over the past six months, and the risks associated with the loans it has already issued have also fallen, because the economy has improved. The bank's day-to-day running costs have also fallen, because of cost-cutting measures AIB imposed. And with the ECB announcing a long period of quantitative easing – or printing money – thereby guaranteeing a steady supply of cash into the euro-zone economy, the cuts were always going to happen.
So can no one claim any credit? Not really, no.
What about the other banks? They will probably have to react to the AIB move at some point, but if you're one of the 300,000 people on an SVR mortgage, don't hold your breath.
