Why a credit union might offer you a far better deal than a greedy bank

A 2.9pc fixed rate mortgage deal is just the start as the little guys take on the giants

The wide disparity in fortunes among credit unions was highlighted by two stories this week. Firstly, the Irish Mail On Sunday reveals (on page two of today’s newspaper) how a small credit union is putting multinational banks to shame with a new mortgage product.

For years, banks have shrugged off scathing criticism that they charge twice as much for mortgages as their eurozone counterparts and don’t provide decent long-term home loans.

Then along comes Cana, a credit union of 7,000 members with a mortgage rate of just 2.9% fixed for 10 years. That’s lower than the cheapest bank variable rates – and over 1% less than comparable fixed loans. This groundbreaking deal emerged alongside a report from the Central Bank on credit unions that cast doubt on the sustainability of the sector unless it adapts quickly.

The report showed falling investment income and a loan book that’s dropped by 28% to €4.1bn over six years, although lending has picked up lately and bad debts are down considerably.

It concluded that the unions were in ‘reasonable shape’ to withstand financial shocks but it warned: ‘Without development of products and services, credit unions are unlikely to develop sufficiently to ensure a sustainable business model into the future.’

It’s true that many small, local unions are struggling to cope with the aftermath of the financial crisis and major new compliance requirements from the Central Bank.

Another Central Bank report early this month noted a ‘minimalist compliance approach in an unacceptably large number of credit unions with limited demonstration of quality and completeness of due diligence on prospective role holders.’

In their defence, credit unions seem to be trying hard to adapt to the new regime. In 2016, more than 5,000 credit union officers attended governance and operations training programmes run by the Irish League of Credit Unions (ILCU). With all this pressure, small unions may find it challenging to jump through onerous hoops to provide mortgages – let alone cutting-edge new deals like Cana’s.

Other big local or occupational

unions like Cana – the Revenue Commissioners’ credit union– are in an enviable position and can adapt with relative ease. .

It’s only a month since a new mortgage-lending platform was launched by the Solutions Centre, an offshoot of the Credit Union Development Association.

There’s no reason why many other big unions, with hundreds of thousands of members, can’t now offer similar deals.

Some – with members including public servants, gardaí and RTÉ staff – are already mounting a serious challenge to banks for savings and personal loans.

The latest published average dividend rate among ILCU members is 0.6% (for 2015), which matches the best demand bank deposit rate, despite all the challenges faced by the CU sector.

On personal loans, the average ILCU interest rate was 10.7% at the end of 2015.

Bank rates vary according to how much you borrow. If it’s €10,000, the average bank rate is currently 9.15% – nearly 1% lower than the CUs.

If you borrow €5,000, bank rates average 11.25% – more than a percentage point higher. So it seems that banks and credit unionss offer similar rates overall. But if you look into the murky small print of the bank deals, you find the borrower doesn’t fare so well, while, with credit unions, it’s the other way around – the add-ons are in your favour.

And they even throw in free life cover on loans.

Banks, as we pointed out in last week’s Money pages, make things complicated to cook up a better deal for themselves. KBC and BoI offer loan rates of 6.3% (€10k) and 7.5% (€5k) respectively. But you must have – or open – a current account to avail of these rates.

Of course you must also open an account to get a credit union loan but there are no charges. To avail of the cheapest bank rates, you’ve got to switch banks or else pay fees on two accounts.

PTSB has come up with a bizarre T&C of its own. To get its lowest ‘cash-secured loan’, you must keep between 25% and 75% of the loan amount on deposit.

The bank is trying to mimic credit unions, who used to insist you kept a large wad of cash on deposit to back up your loan.

But credit unions are cutting out this policy because it increases the cost of borrowing. And even when this rule did apply, it was usually only a third of the loan – not up to 100%! So PTSB is trying to appear like a credit union by adopting one of its worst – and outdated – features.

Some unions already beat the banks hands down.

RTÉ credit union, for instance, has a standard loan rate of 6.95% APR regardless of how much you borrow. You can get even cheaper CU deals for car loans (from 5%) and student loans (from 4%), although rates do vary widely among hundreds of unions.

That compares with 8.5% and 9.7% student loan rates quoted by AIB and Bank of Ireland respectively on the Competition and Consumer Protection Commission’s website consumerhelp.ie. However, BoI does offer cheaper student loans to postgraduates with good employment prospects. You can also get car finance from 0% arranged by motor firms.

Another plus for credit unions is the concept of interest rebates, which pay back a portion of your interest and are designed to reward borrowing.

Members can get both dividends and interest rebates – St Canice’s credit union in Kilkenny, for example, paid up to 1% in dividends and 30% in interest rebates in 2015. This means that if things go well for the union in a given year, members are paid back up to 30% of their interest. This is similar to the dividend paid by banks – except this goes to their shareholders, not their customers.

‘Credit union loans also have loan protection and life savings insurance – at no extra cost to the member,’ said a spokeswoman for the ILCU.

Unions are keen to lend – the upside to the shrinking loan book problem. One credit union – Bray – notes on its website that it approved 98% of loan requests.

However, credit unions are just as restricted as banks under the stern oversight of the CB – so don’t expect soft credit. So, how safe are credit unions? Again that depends on your union. While the Central Bank did once have around 100 on its ‘watchlist’, and remains concerned about many unions, the movement’s woes in the financial crisis cost us far less than the banks.

In 2012, it was thought we’d have to pay €20m to bail out certain credit unions (a pittance compared to the €40bn spent on banks). The total bill – yet to be totted up – is likely to be a fraction of that.

While there may still be concern about the stand-alone viability of some unions, their deposits are secure, doubly protected by a Central Bank guarantee and the credit unions’ collective reserve funds.

The bottom line is that if you’re looking for a loan or a decent return on savings, a communitybased co-op run by over 9,000 volunteers is probably less likely to rip you off than a bunch of profit-hungry, overpaid bankers!