EBS fixed-term rate cut offers some hope to borrowers (The Irish Times)

04 November 2011
EBS is bucking the trend by passing on a fall in borrowing costs to its mortgage clients

Rising mortgage costs, driven higher by the credit crisis, have made life difficult for prospective property buyers as borrowing rules have tightened and lenders have reduced the size of new mortgages they are willing to offer.

Banks and building societies are demanding up to 20 per cent of the value of a property as a deposit, which has forced borrowers to postpone buying until they can save a large lump sum.

Yesterday, EBS and its broker business Haven bucked the trend by reducing some of their fixed-term rates, passing on a decline in their own borrowing costs, as money market swap rates have fallen over the last month.

Interbank rates, at which banks lend money to one another, set mortgage costs on variable and tracker rates, but swaps determine fixed-term borrowing costs.

Swap rates for two, three and five-year money have dropped by 20-23 basis points, or a 0.2-0.23 of a percentage point, over the last month, according to Haven.

The largest decrease at EBS is on its three-year rate for home buyers. This is falling by 35 basis points to 5.79 per cent, below the market average of 5.99 per cent.

Haven is cutting its fixed rates for two, three and five-year rates by up to 30 basis points for residential properties and by up to 40 basis points for investment properties on three- and five-year rates.

"This reflects the lower cost of funding," said Kieran Tansey, associate director of Haven. "I would expect other lenders to at least review their rates and possibly decrease them as well."

Most lenders have pushed rates in the opposite direction as they set out to reduce new lending. Frank Conway, director of the Irish Mortgage Corporation, said: "This has led to a domino effect developing within the banking sector, with other banks following suit on both interest rates and mortgage limits."

Ulster Bank and its subsidiary First Active, Bank of Scotland (Ireland) and Permanent TSB have been among the most aggressive to pass on higher funding costs and restrict lending.

This and lower property prices has had a big effect on the market - the value of new mortgages is estimated to be down 16 per cent for the first six months of the year.

Tracker mortgages have been the first casualty, as they are guided by the European Central Bank (ECB) rate, which lenders say no longer has any bearing on how much they are paying for their money.

Older, lower tracker rates are costing lenders more money to finance, which they cannot pass on to customers.

Permanent TSB and IIB Bank raised tracker rates at first, but have since withdrawn them. Ulster Bank's best tracker rate of 6.1 per cent - the ECB rate plus a margin of 1.85 per cent - compares with a rate of 4.75 per cent (ECB plus 0.75 per cent) this time last year.

The average standard variable rate across the market has risen from 5.31 per cent to 5.81 per cent over the last 12 months. Ulster Bank has raised its standard variable rate to 6.1 per cent (from 5.49 per cent last August).

Cormac McCarthy, chief executive of Ulster Bank Group, said at the bank's half-year results last week that the pressure was on mortgage rates to rise further.

At the half-year results for Bank of Scotland (Ireland) last month, chief executive Mark Duffy said it was "in business to make money" and its decision to "pull back" on mortgage lending reflected that.

Property prices have fallen 12.1 per cent from their peak in February 2007 over the 18 months to last June, according to the latest Permanent TSB/ESRI house price index published last Monday.

This leaves borrowers who took out high loan-to-value or 100 per cent mortgages at the peak of the market in negative equity. These borrowers will be unable to move their mortgage to a new lender as banks and building societies will not finance a new mortgage that is higher than the property is worth.

Karl Deeter, operations manager of Irish Mortgage Brokers, said some of these borrowers will also be moving off low fixed or discount rates and on to higher rates.

EBS's move to cut some fixed rates will offer hope to borrowers that other lenders may follow.