The Government will need to launch an investigation into 'the exploitation' of first-time homebuyers lured by cashback incentives before it commits taxpayers' money into State-owned banks Permanent TSB and AIB buying out loans from Ulster Bank, the country's leading mortgage experts have said.
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Leading mortgage broker Michael Dowling and Brendan Burgess of the Irish personal finance website Askaboutmoney.com have told the Irish Examiner that watchdogs, the Competition and Consumer Protection Commission, or CCPC, and the Central Bank have key roles to play to outlaw cashback incentives which they say have been used by the banks with the most to benefit from the exit of Ulster Bank to drive up mortgage rates.
The Government has placed its State-owned Permanent TSB as well as AIB, which owns the EBS mortgage lender, in the lead positions to buy large parts of the Ulster Bank's €20bn loan books, of which €15bn is accounted for by mortgage loans.
Last week, the Government indicated it was prepared to inject new funds into Permanent TSB for the mortgage lender to participate in the sale of the loans by Ulster Bank owner NatWest.
Under a range of estimates, borrowers could unwittingly pay €40,000 and as much as €74,000 over the term of their home loans by taking out a loan with a lender offering a cashback.
Mr Diy Cashback
Five years ago and ahead of the Dáil 2016 election, Mr Burgess signed up TDs from a broad range of political parties for a campaign that had in part focussed on banning cashback incentives.
He said that cashback incentives were helping to distort competition in the market in favour of the existing big banking groups and were 'exploiting' first-time buyers.
The products were not banned by the Central Bank even as the Competition Commission in 2017 advised home loan borrowers not to let 'the short term gain of a cashback offer dazzle you', citing an example of a switcher who could pay out over €40,000 over the mortgage life by using the incentive.
Yesterday, Mr Burgess said with the Ulster Bank selling its loans, it was time for the authorities to act. 'Cashbacks should be banned and they [lenders] should give the same rates that are available to existing customers as are offered to new customers,' he said. 'In other words, the banks should be told to compete on mortgage rates,' he said.
Mr Dowling, a leading broker, said cashback incentives distort the market in which lenders should be competing on price, 'and price is the interest rate that the lenders are charging'.
He estimates that a first-time buyer on a 90% loan-to-value mortgage of €300,000 will over 30 years pay €74,000 more by sticking with the original lender of the cashback incentive.
The big banking groups, he said, use cashback incentives to distort competition by deflecting customers from new and smaller lenders such as Avant Money and others who compete without cashback incentives and on price alone.
'If you look at the banks that don't offer a cashback, it is very clear that their interest rates are consistently cheaper than those banks that offer cashback,' Mr Dowling said.
'You have the Bank of Ireland which has the dearest variable rates on the market no matter what loan to value ratio you select, and their fixed rates are dearer than the best that is available in the market.
'EBS is exactly the same and Permanent TSB again would have the dearest variable rates in the market, although Permanent TSB's fixed rates are competitive but not at the levels with those that don't offer the cashback,' Mr Dowling said.
'The point is that it distorts the market and if you are a first-time buyer and you are looking at a 2.35% three-year fixed rate with Avant Money at a 90% loan to value, the Bank of Ireland equivalent is at 2.8%, EBS is at the same rate, and Permanent TSB is at 2.9%,' he said.
He said that lenders are throwing cash at the first-time buyer, or 2% of the loan amount which averages at €6,000 upfront.
'The problem is that borrowers with cash-backs when they come off the fixed-rate, a significant number will not switch and that is where they catch you — inertia.
Mr Cashback
'You are with the bank and the bank will say you are on a 2.8% fixed rate and we will offer you the variable rate and the problem is that people do not react at that time,' Mr Dowling said.