Friday, September 9, 2011

Variable rate mortgages are fundamentally unjust

The vast majority of mortgages offered by Irish banks are variable rate mortgages, so most consumers have no option but to choose one. However, I have always struggled to see how this system could be considered fair. Consumers have to choose a lender based upon what rate they are currently charging, but since the rate will change several times over the life of the mortgage there is no guarantee that the lender they choose will be cheapest overall.

The way this system works is that the banks constantly alter the rate of interest that they charge mortgage holders based upon the rate that the bank have to pay on the inter-bank markets to borrow money (plus a profit margin of course). It might seem at first glance that this is fair, but surely the bank only need to source money on the inter-bank markets when they give out new mortgages rather than constantly through the life of a mortgage. If most mortgages are for a term of 20 years or more, this means that on average mortgage holders took out their mortgages about 10 years ago and hence the inter-bank rates charged 10 years ago are more relevant than the inter-bank rates now.

It could be argued that consumers are free to choose which bank they want to get a mortgage from, but since consumers need to pay considerable administrative fees to switch from one mortgage provider to another, they don't really have a choice to switch from one bank to another in the middle of the term of the loan. Some banks exploit this fact by offering new customers a special introductory offer for the first year, which means that they are using their existing customers (who have no choice) to subsidise potential new customers (who do have a choice). Surely this is grossly unfair and should not be allowed!

A few Irish banks offer fixed rate mortgages where the interest rate is fixed for a limited term (e.g. 3 or 5 years), but since most consumers want a mortgage over 20 years or more this is of limited value to consumers. I wonder why no Irish bank offers customers the option to lock the interest rate for the entire life of the mortgage - banks in other countries offer this. 


  1. I agree, it's unjust for property owners. Then again, banks and financial institutions do enable mortgage takers to enjoy new property way before payment completion. It's just the price we pay for. We can try to look for the best offer we can get.

    IT contractor mortgages

    1. This business cycle is sometimes just unfair because, sometimes you end up getting your property and losing it after a few years or so. Hopefully they can implement rules with extending co-borrowers payment completion.