The response to Government pressure on the banks to lower standard variable mortgage rates has been slow, so AIB’s decision to reduce its rate for new and existing borrowers, for the third time in recent months, is welcome. The extent of the bank’s profits and the margin on its lending mean that the reduction is warranted. Slowly, some competition seems to be returning in the residential mortgage market, though conditions are still some way from normality.
In a properly functioning market, competition for lending would have brought rates down more quickly. In Ireland’s post-crisis banking market, financial institutions are only slowly coming back to health, and the level of competition in the market has reduced. The decision of KBC Ireland to consider divesting its Irish operation once it returns to profit may remove another player from the pitch, though the bank underlines that no decision has been taken. Slowly, more choice and better value is emerging in the mortgage market though, given the level at which banks are raising funding, rates of 4 per cent or more – still being charged to many – appear too high.
While Government intervention is not an ideal tool, the Minister for Finance, Michael Noonan, needs to keep up the pressure. And consumers should not be afraid to take matters into their own hands by seeing if they can get a better deal from another lender. In some cases this will be possible. A feature of the emerging market is that better value is available for what are perceived as lower risk borrowers, typically those with lower loan to house value ratios, while some banks are concentrating on offering better fixed rate arrangements.
ECB interest rates look set to remain low for the foreseeable future, given that the euro zone economy is weaker than the UK and US, where speculation has started on when interest rates will start moving back up. Here, the current level of interest rates is exceptional and at some stage borrowing costs will start to rise again. Both borrowers and lenders need to do what they can to put themselves in a strong position for when that happens.