A flawed market

As Minister Eamon Ryan's movement to bring some level of protection to troubled mortgage-holders gains steam, should we be looking at extending some of those protections to mortgage holders who are not in trouble, but are in danger of being fleeced in a flawed market? I am thinking here of variable mortgage holders, including the hundreds of thousands of Permanent TSB customers with standard-variable-rate (SVR) mortgages who this week will be forced to pay an extra 0.5pc each month.

A call for intervention into a working competitive market should generally be viewed with some scepticism. Aside from the endangered species that is proper regulation, free markets generally work best when left to themselves.

Banks did not hike up SVR mortgages during the boom because customers would have moved en masse to competitors. But that is a word that no longer has meaning in the banking market. Unless you are looking to deposit money, there is no competition between the banks. Books have been, and will continue to be, written on whose fault this is, but is was not the fault of the holders of SVR mortgages.

Your typical SVR holder is an older customer who is not particularly interested or informed on financial matters. The people who during the boom took up buy-to-lets in locations that only looked attractive through the prism of cheap money, and topped up their mortgage for lifestyle reasons, typically had enough gumption to be on a tracker, or at least a fixed-rate mortgage.

Permanent TSB's SVR customers are now paying 3.69pc for their money. Compare this to a mortgage holder with an interest-only tracker from NIB, who may be paying as little as 1.79pc for the same money with the same loan-to-value ratios.

It is not fair to single out Permanent TSB, which is merely the first bank to increase its SVR mortgage rate. Bank of Ireland will follow relatively quickly and when these two have passed the lets-hike-our-rates Rubicon, the reputation risk for others players will be so low that the new hiked rates seem likely to become the market norm.

Given that the Government and the Regulator both bear at least some of the responsibility for the banking crisis, can either really sit by and allow banks to impose what is effectively a levy on older, more vulnerable mortgage holders.

Let's put it another way. Were the banks to meet in private and decide to hike SVR rates that would constitute operating a cartel, a transgression which carries a jail sentence. We have these laws because we feel the consumer should be protected from price-fixing, which in effect is an illegal levy.

You can only legitimately argue that the hundreds of thousands of people with SVR rate mortgages do not need similar protection if you argue that the banks are currently operating in a competitive market.

If it is acceptable to increase SVR mortgage rates by 0.5pc, why not 5pc? If it is acceptable to levy an extra €50 per month on our oldest and most vulnerable mortgage holders why not a levy of €500?

We are currently operating in an artificial banking market, which is subject to considerable ongoing Government intervention, populated by banks under unprecedented pressure to increase revenue. As we have changed the market so too must we change our market protections, particularly those that apply to the most vulnerable.

Tom McEnaney is associate editor at Business & Leadership.To receive Tom's weekly opinion column free to your inbox, subscribe to The Business Week ezine.