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Mortgage Interest Rates

Dáil Éireann Debate, Thursday - 23 April 2015

Thursday, 23 April 2015

Questions (82)

Lucinda Creighton

Question:

82. Deputy Lucinda Creighton asked the Minister for Finance his plans to incentivise the banks to reduce the interest rate on variable rate mortgages; if he will indicate what those proposed plans are; and if he will make a statement on the matter. [16168/15]

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Written answers

At the outset, I would like to confirm to the Deputy that the lending institutions in Ireland - including those in which the State has a significant shareholding - are independent commercial entities. As Minister for Finance, I have no statutory role in relation to regulated financial institutions setting interest rates.

The mortgage interest rates that financial institutions operating in Ireland charge to customers are determined as a result of a commercial decision by the institutions concerned. Each institution determines the rate it charges its customers, depending on a number of factors, such as cost of funds, and commercial considerations (such as competition, risk pricing and the impact on deposit rates).

The Central Bank has responsibility for the regulation and supervision of financial institutions in terms of consumer protection and prudential requirements and for ensuring ongoing compliance with applicable statutory obligations. However, the Central Bank has no statutory role in the setting of interest rates by regulated entities, apart from the interest rate cap imposed on the credit union sector in accordance with the provisions of the Credit Union Act, 1997 and the requirement to be notified of penalty or surcharge interest imposed in respect of arrears.

Nonetheless, the issue of regulation of interest rates remains a policy area under active review and has been the subject of recent correspondence between the Department of Finance and the Central Bank. The current position is that the Central Bank does not have new proposals for the additional regulation of interest rates. However, as I have outlined in previous Parliamentary Questions, a former Deputy Governor indicated that, within its existing powers and through the use of persuasion, the Central Bank would continue to engage with specific lenders which appear to have standard variable rates set disproportionate to their cost of funds and this is a course of action I expect the Central Bank to continually appraise.

The Deputy should be aware that the Governor of the Central Bank, Patrick Honohan, in his opening statement to the Oireachtas Joint Committee on Finance, Public Expenditure and Reform last November stated that in Ireland, as in most advanced economies, it has long been understood that tight administrative control over the rates charged by banks would be counterproductive in ensuring a sufficient flow of properly priced credit on a lasting basis. Such control would strongly discourage new entrants when, in fact, ongoing competition in the banking sector will be crucial in ensuring that the economy is provided with efficient and cost effective banking services. In this regard, there have been some movements on mortgage interest rates of late by a number of institutions which suggest that the market may be entering a new and more competitive phase.

Furthermore, the Central Bank (Supervision and Enforcement Act) 2013 introduced changes to Section 149 of the Consumer Credit Act 1995 which regulates fees and charges in order to attract new entrants to the Irish banking sector and there is some evidence of improvements in the banking sector with a number of institutions introducing new products and adapting their business model. In the last 12 months there have been a number of new entrants to the Irish mortgage market bringing additional and welcome competition to this sector.

I should add that myself and the Governor of the Central Bank meet regularly, the latest of these meetings took place on 2 April. Among the items discussed was the issue of mortgage interest rates. The Governor provided an update on the ongoing work that he and his officials are carrying out on the issue of the standard variable rates charged by the lenders.

We noted that the SVRs charged in Ireland are higher than other euro area countries and have not fallen in line with ECB wholesale rates. The Central Bank will continue to research why this is the case and will publish results shortly. The Governor will update me on progress in due course.

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