Saturday, 10 July 2010

Home truths for Charlie Weston

Charlie Weston is the Personal Finance Editor of the Irish Independent. The Irish Independent in turn is probably the greatest receptacle of garbage posturing as journalism in Ireland. It is match made in heaven.

Friday is the day refuse is collected up my street. Friday was the day Charlie wrote this "opinion" piece:

This gives the gist of the column:
IT makes little sense, and it was probably never meant to. At a time when record numbers of homeowners are at the pin of their collars trying to repay their mortgages, lenders are piling on the pressure by hiking interest rates.
In the past year alone, mortgage interest costs have shot up by 16.5pc, according to the Central Statistics Office.
The CSO only looks at standard variable rates when it examines mortgage costs, so the statisticians are reflecting the pain being borne by those with these variable mortgages.
Lenders are free to push up variable rates whenever they want -- something households with these types of mortgages have learned to their costs in the past year.
It is hard to get your head around the 16.5pc figure, but what it means is that a family with a not-untypical mortgage of €250,000 has seen the annual cost of repaying it jump by €1,300 in the past 12 months.
In monthly repayment terms the original payment of €954 a year ago has now zoomed up to €1,110, based on two separate 0.5pc increases in the past year.


This is at a time when the European Central Bank has not moved its main rate off it record low of 1pc since May last year

Such drivel perpetuates ignorance of financial matters. That would seem to me to be at odds with the general job description of a "Personal Finance Editor", even at a newspaper that chooses to inhabit the lower reaches of the newsprint media.

The ECB rate Weston refers to is of course the "refi" rate. This is the rate at which banks can secure short term liquidity (but increasingly long term over the financial crisis and beyond) by handing over assets like government bonds as collateral. It is a bit like going to the pawn broker. Of course, at the moment the pawnbroker is acting like Saint Vincent de Paul, charging banks little in interest and allowing more freedom in terms of collateral and term. Nevertheless this is short term and requires assets to be handed over.
What this refi does not do is determine the total cost of money bank have available to lend at all times, because that is determined by the major sources of their capital which includes:
  • What banks need to pay to attract deposits
  • What banks need to pay as interest in short and long term bonds to investors
  • What banks need to pay other banks for short term borrowings (interbank funds)

All these are determined by a number of factors that are determined by the market in general and the specific bank concerned. Needless to say that the agents listed above (depositors, other banks, investors) have been and continue to be far less interested in giving charity to Irish banks - which is what the 1% ECB refi rate effectively is.

So the point good old Charlie should be making plain is that mortgages have gone up because that is the true cost of the money borrowed by Irish households. It is now better reflecting what they should be paying given what a risky proposition they are. In fact, what a risky proposition they always were, but haven't had to pay over the bubble times.

Of course I get the feeling that the intention of the piece is to make people think that banks are profiteering. As an unwilling shareholder in Irish banks, like every other Irish taxpayer, I only wish that was the case.

And just to put things into proper perspective, despite these shocking increases that Charlie is up in arms about standard variable rates range from a low of less than 3% for the most attractive customers up to the more typical 4%. To claim this is usury borders on outright lie. Strange how Charlie never specifically mentions these rates. I wonder why.

What figures Charlie does throw around includes the €1,300 annual increase in mortgage repayments for a hypothetical €250,000 mortgage. This is apparently beyond the pale according to Charlie, although remember this is price charged for something borrowers voluntarily agreed with the bank.

Here is something that is also putting "hard pressed homeowners" under pressure. It is also something that is dumped on homeowners with no choice on their part. Tax. Yes, if we imagine that this hypothetical €250,000 mortgage is held by a homeowner with a €65,000 salary (€250,000 is too much to borrow on that level of income, but it is a realistic scenario in Ireland - hence the problems) we would note that the tax burden of such a person has increased by about €2,600 over the last couple of years. And you can bet that homeowner didn't voluntarily enter into an agreement to set up one of the most over inflated, wasteful, inefficient and in far too many areas completely pointless public sector.

No the politicians decide that and simply send the bill.

But the following is the kickker as far as Charlie is concerned. This is what he wrote around a year ago, when the problem wasn't rising variable rates, but falling rates, which those people who had fixed their mortgage could not participate in and would need to pay some recompense to the bank if they wanted to welch on their deal.

Some people on fixed rates are paying up to €600 more a month more than those on variable home loan deals.

But to get out of these deals lenders impose a penalty, called a redemption fee. This is the cost difference between the rate the customer is on (which can be as high as 6pc) and the rate presently charged on its variable rate.


Granted, people locked into bad value fixed rates should have been aware of what they were getting into.

But as enormous flexibility has been shown towards our banks by the State, it is not unreasonable to expect banks to be flexible towards those stuck on fixed rates.

I would hate to enter into any type of wager with Charlie. Could you imagine the rules; "heads I win tails you lose".


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