The entry of Bank of Scotland into the Irish mortgage market is welcome. For some years now there has been speculation that an international player would come into the market, attracted by the high level of profits recorded by the domestic institutions. However the aggressive nature of Bank of Scotland's entry appears to have taken the Irish banks and building societies by surprise. The new entrant is offering a variable interest rate of 3.99 per cent - an APR of 4.1 per cent - which is well below anything available in the market at the moment. How can it do this? The Bank of Scotland says that it can maintain a lower profit margin on its business than can the existing institutions. It will not have to support a branch network here and will run its operation through a telephone service based in Edinburgh and through some Irish mortgage brokers. It says it will offer mortgages on up to 80 per cent of the purchase price of a property and respect the Central Bank guidelines in terms of how the total loan relates to the income of the borrower.
Initially, the Irish banks and building societies will wait and see the reaction from borrowers. However they will have to respond soon enough. Bank of Scotland is a large and reputable institution and appears to be taking a serious approach to the market here. Unless they respond quickly, the Irish lenders risk quickly losing market share and even facing some defections from their own customer base. The banks and building societies here will hope that their existing position in the market and their relationships with their borrowers will protect them to some extent. However they may find that consumers are willing to shop around. Increasingly, mortgages are becoming just another commodity for consumers. Price is not the only issue when they make their choice, but it is a key factor, especially given the extent to which the Bank of Scotland variable rate is below what is currently on offer. Some caution is called for. The rate offered by Bank of Scotland is a variable one and can be increased in years to come. Most mortgages are for 20 years and what matters is not the interest rate on day one, but the rate which applies over the bulk of the period of the loan. Also, the bank is not yet offering a full range of the increasingly popular fixed interest rate products. It also remains to be seen just how it deals with customers and how much it is willing to commit to the market here. That said, competition is welcome. Consumers have already seen the benefits of new competitors entering markets such as air travel and telecommunications. More competition in the financial market can only be to the benefit of consumers. It may, however, put pressure on some financial institutions and accelerate restructuring and cost-cutting in the sector.
Despite some pushing up in the cost of fixed rate mortgages, the outlook for borrowers remains favourable. Last night the Federal Reserve Board increased US interest rates by 0.25 of a percentage point, but it looks unlikely to order any further rise over the rest of the year. The European Central Bank is unlikely to push its interest rates higher until next year and then any rises should be modest. Now increasing competition in the market should also help to keep borrowing costs down. Good news for borrowers, although not for depositors who suffer when interest rates remain low.