I thank the committee for the invitation to appear before it. I will make a few opening remarks to put this matter in context and, following that, I will be delighted to deal with any questions members may have. Before I begin, I wish to introduce my colleagues, Mr. Niall O'Grady, general manager with responsibility for business strategy at Permanent TSB, and Mr. David McCarthy, group finance director of Irish Life & Permanent plc, our parent company.
The reason we are here is, of course, to respond to the committee's request to discuss the recent rise in mortgage interest rates which we announced on Friday, 24 July last. That decision provoked considerable comment so perhaps I should begin by briefly outlining the decision we announced at the end of July and the background to it. Permanent TSB bank has approximately 190,000 residential mortgage customers, some on variable rates, some on fixed rates and some on tracker rates. At the end of July, we announced that we would be increasing the rate of interest we charge on our variable rate mortgage products by up to 0.5%.
Before reaching this decision, we carefully analysed how this increase would impact on customers. First, it is important to be clear that this decision did not affect all of our mortgage customers. We estimate that some 38% of our mortgage customers — approximately 72,000 customers in total — have some form of variable rate products. The remaining 118,000 mortgage customers — nearly two thirds of our mortgage customers — are not affected by this decision at all and will see no change to their repayments as a result.
There was also some confusion as to how much repayments would rise for those affected by the decision and a lot of exaggerated figures were used. The reality is that the average outstanding mortgage for affected customers stands at €62,500 and the mortgages have, on average, 13 years left to run. Therefore, the decision has led to an average increase in affected customers' monthly repayments of €14.75. It is worth bearing in mind that even after that decision was taken, Permanent TSB remains among the most competitive lenders in the market for standard variable rate mortgages.
If one compares standard variable rate products in the marketplace today, one will find that the rate which we charge is lower than the rate being charged by five other banks and financial institutions, including many household names. The reason is simple, those institutions — none of which is covered by the State guarantee introduced last September — did not pass on all of the ECB rate reductions which took effect over the past 12 months. We did.
When we announced our decision, we made clear that it had been made with regret but that we felt we had no alternative but to do what we did. I will explain what we meant by that. Like all financial institutions, Permanent TSB bank is facing difficult challenges at present. In fact, at the recent results presentation of our parent company, Irish Life & Permanent plc, we confirmed that Permanent TSB bank lost €132 million during the first half of this year. Two factors drove that loss; first, the fact that we had to make extra provisions in light of an increase in impaired loans and, second, the fact that we are having to pay significantly more for the raw material of our business, namely, money.
I will illustrate that point with an example. Today anybody in this room can go into any of our branch offices and if he or she places money in a fixed term deposit account with us, we will pay him or her a rate of interest of 3.5%. We have to do that to compete for deposits, which are our raw material and are critically important to us. However, when we in turn lend money to our customers in the form of mortgages — l will use the example of mortgages on the standard variable rate product after the recent increase — we are only charging 3.19% for the use of that money. It is clear that a business model where one pays more for one's raw material, namely, deposits, than one does for one's finished product, namely, mortgages, is not sustainable.
Some of the criticism we received at the time of the rate increase was based on the fact that the ECB is charging historically low rates for money. If it did not increase its rates why did we? The ECB provides us with approximately 30% of our funding at the moment but it does not set the cost of all the money banks such as ours need to borrow. Other sources — such as term debt and deposits — are quite a bit more expensive than the official ECB rate would imply. Sourcing those funds is incredibly challenging at present. For example, during the course of the early months of this year we and other Irish banks saw many foreign companies take money out of deposit accounts in this country and deposit it in banks in their countries. We estimate that we lost as much as €3 billion in corporate deposits as a result. Thankfully — and it is a tribute to the hard work of all our staff across the country — we successfully replaced that money with approximately half coming from bigger retail and domestic commercial deposits and the balance was re-financed through increased interbank deposits and from new term debt issued. However, it is a tough challenge to be able to do so, and an even tougher one to be able to do so at reasonable rates of interest.
Because funds remain expensive we are seeing what is called our net interest margin decline. The net interest margin is the difference between the interest we earn on loans we have given out and the interest we have to pay on deposits. As that declines, it affects our profitability. When that decline occurred, we sought at first to reduce costs. In the first half of this year, we reduced underlying operating costs in the bank by 10% compared with the same period a year ago. We have significantly reduced the numbers employed by the bank through a number of innovative initiatives such as paying people a portion of their salaries to take a career break with the promise that they would be re-employed in a few years time and not replacing people who were leaving the bank. We froze salaries and cancelled bonuses. We reduced budgets across the business and significantly reduced discretionary spends in all areas of business. We will continue to keep a strong focus on managing costs but it is clear that that alone will not be sufficient to make up for the pressure on our margins. It was that fact — and the outlook for further margin pressure in the months ahead — that forced us to take the decision to raise rates.
It is worth bearing in mind that the rates charged on mortgage lending in Ireland are exceptionally low by international standards. In the UK, for example, the average rate charged on mortgage products is 4.2%. That compares with our standard variable rate after the increase of 3.19%. The gap is more than 1%. In recent months a number of Irish banks have expressed the view that it is difficult to see how rates for mortgages in this country can remain lower than rates for the same products in other countries for much longer. I agree with that view.
In conclusion, I will briefly summarise my key arguments. The margin we are earning from our loans to customers is lower now than at any stage during the past eight years. We are paying people more to put money on deposit with us than we are charging people to borrow money from us. We are committed to being a responsible business. For example, we have avoided the perils of NAMA because we did not engage in the type of toxic lending to developers that has caused so many problems for other banks. We want to ensure that we can continue to play an important role in the banking industry here for many years to come. To do that, we must ensure that we take steps to manage our business responsibly. With that in mind we took the decision to increase the rates that apply to a proportion of our customers with reluctance — but we stand over that decision.
