Michael Healy-Rae
Question:104. Deputy Michael Healy-Rae asked the Minister for Finance the reason the average rate for a new mortgage here is so high (details supplied); and if he will make a statement on the matter. [35684/18]
View answerFriday, 7 September 2018
Questions (104)
Written answers
As the Deputy will be aware, there are a number of factors that influence mortgage interest rates in Ireland. These include the high level of non-performing loans (NPLs), the low rate of repossessions, a reduced number of banks in the system and the high proportion of tracker rate mortgages on the bank books.
In line with the continuing economic recovery, the level of mortgage arrears and non-performing loans has now declined from the peak but they are still significantly higher than most other euro zone countries. High holdings of NPLs reduces profitability, increases funding costs and ties up bank capital, which has a negative impact on the supply of new credit. All of these factors feed through to higher interest rates for new mortgages. Ireland’s NPL ratio was 13.3% at Q1 in 2018 compared to an EU average of 4%.
There is a very low rate of repossessions in Ireland. The lower risk rating that secured lending attracts is compromised because the realisation of collateral is a lengthy and difficult process. As mentioned previously in relation to NPLs, our low rate of repossessions leads to a lower supply of new credit and higher interest rates than would otherwise be the case for the market as a whole in the future.
Competition has been reduced due to a decline in active lenders from 12 ten years ago to five now. This is likely to be a contributing factor, along with the high level of NPLs, to the fact that Central Bank research from May 2015 found that the spread between official ECB rates and standard variable rate is relatively high and that new lending rates are above average compared to European peers.
Furthermore, the Central Bank undertook research in the area of mortgage switching in 2017 through a public consultation with the objective of considering some possible changes to the Consumer Protection Code to further promote switching in the mortgage market. This was to build on the measures introduced last year which required lenders to provide more information to borrowers on how they set and adjust standard variable rate (SVR) mortgages and also to improve the level of information they provide to borrowers about their other mortgage products which could provide savings for the SVR borrower. The Central Bank published their responses to the submissions they received in June this year and an Addendum for Enhanced Mortgage Switching Measures: Transparency and Switching will come into effect on 1 January 2019. Among the changes that will be introduced are:
- The introduction of a fixed rate transparency measure which introduces a 60 day notification period for consumers whose rate is about to expire.
- There will be enhanced mortgage transparency measures on variable rates on Loan-to-Value (LTV) which would mean lenders would notify consumers on an annual basis of whether they can, or cannot, move LTV interest rate bands, subject to the provision of an up-to-date valuation to their lender. If the particular lender doesn’t allow for such movement between LTV bands, they must notify the consumer that other banks may offer such movement.
- A measure to improve the transparency of incentives linked to mortgages will be introduced to ensure sufficient clarity for the consumer and the advertising of same.
- In terms of potential switching savings measures, on request of the consumer, lenders will be required to provide existing borrowers with an indicative comparison with alternative or new rates offered by that regulated entity only but also they will have to provide a link to the CCPC website that allows customers make sure they are availing of the best available interest rate.
- All lenders will provide standardised information on the mortgage process and if switching, both the original and new mortgage lender will establish a switching point of contact/switch team.
- All lenders will provide redemption figures to the consumer or their legal representative within 5 days and will keep the consumer updated throughout the mortgage process with specific timelines for the different parts of the process.
As the Deputy can see, the higher rates charged for new mortgages in Ireland versus other European countries stem from a range of factors such as the high level of NPLs. The ongoing recovery in our economy, which is reflected in strong employment growth, is helping to reduce the levels of NPLs, together with the range of initiatives and protections introduced for those in mortgage arrears.
The Government is of the opinion that increased competition and switching in the market, rather than administrative controls, remains the best way to ensure that retail lending rates are driven down in a sustainable way for the market as a whole but without giving rise to potentially undesirable consequences for the provision of new mortgage lending.