Beware a bank duopoly

Competition suffered after Bank of Scotland, Halifax and Postbank quit the market. Most of the foreign banks that remain have battened down the hatches, concentrating on recouping loans made during the credit boom rather than competing for new business.

There were 14 mortgage lenders before the banking crisis hit in 2008. After the restructuring there will be seven, although brokers say that AIB, Bank of Ireland and KBC Homeloans are the only ones open for business. Seven banks provided current accounts in 2008 but that has dropped to five.

We look at the tactics banks are using as competition dwindles and tell you how to avoid being caught out.

Beware of risk

Banks are desperate for your savings and will try to switch you to tracker bonds to lock in your money for as long as possible. Trackers promise to protect your capital and offer returns that appear attractive compared with deposits.

What look like safe bets could be a lot riskier than you realise, though, because trackers are only as reliable as the ability of Ireland’s hobbled banks to support them.

AIB’s Euro Return Fund Issue 12, available from tomorrow, promises to repay your capital after four years and nine months with a minimum return of 4.6% a year before tax. If the Euro Stoxx 50 index performs well, you could get more.

AIB says the fund “may appeal to cautious investors”.

Paul McCarville of Clarus Investment Solutions said: “Tracker bonds that depend totally on the creditworthiness of Irish banks should be regarded as fairly high risk. It is questionable whether these products should be marketed as low or medium risk.”

You could earn a better return for a similar level of risk by investing in 10-year Irish government bonds, which are yielding more than 10% a year. The Euro Stoxx 50 index would have to grow by 120% by February 2016 before AIB’s tracker bond would match this return.

Government bonds can be traded on the stock exchange at any time, while AIB’s tracker bond locks up your investment until maturity.

Dumping free banking

Bank of Ireland turned the screws on customers in February by restricting free banking to those able to keep at least €3,000 in current accounts at all times. They can also avoid charges of up to 28c per transaction by lodging €3,000 every quarter and making nine payments by phone or online.

AIB will stop paying interest on current account balances from June 15 and impose higher charges on debit card purchases made outside the eurozone.

Ann Fitzgerald of the National Consumer Agency said: “Only two banks, National Irish Bank and Ulster Bank, offer free banking with no conditions. Others are making it more difficult to qualify. You may find the conditions are not too difficult to meet. Otherwise, switch to a bank that still offers free banking.”

Conditions for free banks are available on nca.ie.

Punishing loyalty

Long-serving customers pay more interest on their mortgages and earn less on their savings. Bank of Ireland, for example, refuses to allow customers to transfer savings into its new Double Your Interest deposit account. It pays 3% interest, rising to 6% for money reinvested after a year.

Loyal borrowers are more likely to be on standard variable mortgage rates (SVRs), which lenders are increasing even though the European central bank (ECB) has left interest rates on hold since 2009. Permanent TSB led the latest round of hikes, taking its SRV to 5.19%. It was followed by Ulster Bank (4.35%), EBS (4.43%), Haven Mortgages (4.45%) and Irish Nationwide (4.4%). More rises are on the way if, as expected, the ECB increases interest rates this week.

Customers cannot escape the increases: these lenders are unable to offer fixed rates because the banking crisis has cut off their access to funding. Permanent TSB’s problems are so severe that they prevented it combining with either of the two main banks. Eddie Hobbs, the TV money expert, believes the ECB and International Monetary Fund must intervene before rising mortgage rates push more homeowners into arrears.

“We need to move as many mortgages as possible to new fixed rates, not the short-term products favoured by Ireland’s banks but decent, long-term rates fixed for the remaining term of the debt,” he said.

Headline grabbers

Banks use many tricks to try to squeeze into our Best Buy tables, including introductory bonuses that quickly disappear after savers open an account.

Ulster Bank’s Direct Saver account pays a headline interest rate of 2.78% for online savings of at least €15,000. This includes a 1% bonus, though, that runs out after a year.

Brendan Burgess of Askaboutmoney.com, a personal finance website, has complained to the Central Bank about the way that Ulster Bank uses eye-catching interest rates to sell tracker bonds.

Its Index Combination bond, which closes this week, pays 14% interest for a year on 30% of your money, investing the rest in a tracker bond for six years.

Burgess’s complaint says: “I believe combination bonds are in breach of the consumer protection code in that they are constructed to confuse the customer. There is no reason to combine products of different maturities and with different returns except to confuse customers.”

Ulster Bank declined to comment except to say that it takes the issue of compliance “very seriously”.

Biased advice

The job of branch staff is to sell the bank’s products, not to act in your best interest.

Their bias is apparent when it comes to savings, the only product for which banks still compete. Staff will focus on the interest rates on offer but savers should be equally concerned with the safety of their cash, especially after Michael Noonan, the finance minister, acknowledged last week that our banking system is broken.

The eligible liabilities guarantee (ELG), which covers savings in Irish banks without limit, expires on June 30, although it may be extended until the end of the year. Gary Hanrahan of Capital Options, an adviser, said: “When the ELG is withdrawn, the deposit guarantee scheme of up to €100,000 per depositor will be the remaining protection. Depositors should not leave all their eggs in one basket.”

Investec, National Irish Bank, Nationwide UK (Ireland), Northern Rock and RaboDirect are covered by foreign guarantees (see chart) and pay competitive rates of interest.

Borrowers should also treat banks’ advice with caution, especially if they are struggling to pay their debts. The new government is examining ways to help them, including the reform of bankruptcy laws and a new personal debt management agency to give protection from creditors while borrowers try to sort out their affairs.

Banks are unlikely to alert you about government plans if you are trying to renegotiate your debts. Noeline Blackwell of the Free Legal Advice Centres said: “Entering arrangements with your creditors while new legislation is pending might not be the way to go.

“Consolidating your debts into a new loan might not be in your interests, even if it is possible, when a reformed bankruptcy regime may become available. Agreeing a deal on your debts this year, however, doesn’t make you ineligible for bankruptcy next year, after the rules are reformed.”

A desperate sale by raffle

Anne O’Keeffe, 33, is holding a raffle on May 6 to offload a business premises in Cashel, Co Tipperary, because Allied Irish Banks is refusing to renegotiate her debt of €260,000.

The bank, now propped up by the taxpayer, gave her a 100% mortgage to buy a beauty salon and apartment in 2006, with her father acting as guarantor. AIB agreed to interest-only payments for the first few years, and extended this arrangement in 2009 when O’Keeffe’s beauty business fell victim to the recession. Now the bank is demanding that she repay capital too.

“Interest-only costs me €600-€800 a month, but this will increase to €1,600-€1,700 in May when I have to pay capital plus interest,” she said. “I begged the bank to continue with interest-only, but it didn’t want to know. I’m not entitled to the forbearance measures available for homeowners because it is a commercial mortgage.”

O’Keeffe has tried to sell the property, even though its most recent valuation of €160,000 would leave a mortgage shortfall of €100,000. “Two people were interested, but they couldn’t get finance from the banks,” she said.

The raffle is a last resort. The aim is to sell 3,500 tickets at €100 each, with any profit going to charity after the debt and related expenses are repaid. It will go ahead if ticket sales reach 2,000, and O’Keeffe hopes AIB will accept other ways of clearing the €60,000 shortfall this would leave. The deadline for tickets, from 100europroperty.ie, is April 29.

“This has been a nightmare experience with a lot of sleepless nights,” she said. “Whatever happens, I can’t leave my debt on my father’s shoulders.”