Mortgage Interest Rates

Dáil Éireann Debate, Wednesday - 18 November 2015

Wednesday, 18 November 2015

Ceisteanna (5)

Shane Ross

Ceist:

5. Deputy Shane Ross asked the Minister for Finance to set out the progress he has made in his efforts to force Bank of Ireland to reduce its variable rate mortgages; to state the banks that have reduced variable rates; if Bank of Ireland, in particular, has refused to reduce its variable rates; if, as a shareholder in the Bank of Ireland, he will be able to persuade it to bring back its variable rates to competitive levels; and if he will make a statement on the matter. [40400/15]

Freagraí ó Béal (6 píosaí cainte)

Deputy Shane Ross

The item referred to by Deputy Michael McGrath is not the only example of the Bank of Ireland going walkabout. I realise that the Minister has a 14% share in the bank, as he said, but I wonder what has happened about variable rate mortgages. I think it was as long ago as the spring when we first heard that the Minister was meeting the heads of the banks about the absolutely exorbitant variable rates they were imposing. There has been some movement by AIB and perhaps one or two other banks, but it appears that Bank of Ireland has not moved at all. I would like the Minister to clarify where we stand and where he stands on the matter.

Deputy Michael Noonan

I remind the Deputy of the steps I have taken to ensure the banks provide options for mortgage holders to reduce their repayments. Last May I met the six main mortgage lenders and outlined my view that the standard variable rate being charged to customers was too high. The banks agreed to review their rates and products and, by the beginning of July, to have simple options in place to reduce monthly mortgage payments for standard variable rate customers. In September I concluded a series of follow-up meetings with the banks, most of which have put options in place to allow borrowers to reduce their repayments. As the Deputy knows, Bank of Ireland is a privately owned company in which the State maintains a minority shareholding. He will also be aware that in my role as Minister for Finance I have no direct function in the relationship between the banks and their customers. I have no statutory function in the commercial decisions made by individual institutions at any particular time, including the setting of product interest rates. Such decisions are taken by the board and management of the relevant institution. A relationship framework has been specified that defines the nature of the relationship between the Minister for Finance and the bank. This was published on 30 March 2012 and can be found on the website of the Department of Finance. It is up to the individual banks to advertise their rates and products. I am sure the Deputy is aware that some banks have focused on fixed rate offerings or rates based on loan-to-value, while others have reduced their variable rates. I asked the banks to provide options which borrowers could use to reduce their monthly repayments. I believe options have been put in place. Bank of Ireland, for example, has chosen to focus on its fixed rate offerings which are available to standard variable rate customers. I understand Bank of Ireland customers can now avail of a fixed rate of 3.6%, which is substantially lower than its current standard variable rate. The bank also offers other options, including a ten-year fixed product which offers borrowers security on their repayments.

Deputy Shane Ross

It seems that the Minister's reply means that Bank of Ireland has done nothing whatsoever, or very little, about its standard variable rate. Although the Minister has been able to influence the State-owned banks, I suggest his relationship with Bank of Ireland is that of a junior partner. It is all very well for him to clothe it in a certain type of language by saying he has no day-to-day influence over the running or operation of the Bank of Ireland. I accept that he cannot intervene in the running of Bank of Ireland in a meaningful way, but it appears that when an effort was made to persuade it to reduce its standard variable rate, the attitude it took was completely different from that taken by AIB. The Minister referred obliquely to AIB's decision to reduce its rate. Bank of Ireland decided to eyeball him by doing nothing. It offered fixed rate options, but it left its variable rate very close to the exorbitantly high rate at which it was. Does this mean that the bank, in which the Minister has a 14% shareholding, is operating on a completely different basis on these matters from AIB, in which the Minister has a shareholding of approximately 98%? If these two large bodies which constitute a duopoly are operating on different terms and have different relationships with the Government, it is a matter of some concern.

Deputy Michael Noonan

As an opening position, I accepted the argument made in this House and elsewhere that the standard variable rates being charged by banks and mortgage lenders in Ireland were higher than the market would seem to justify. I met the banks on the basis of that argument and asked them to reduce their standard variable rates or bring forward other products that would show a reduction and give people options. I do not want all of the banks to offer the same options. I want some competition in the market where different options are offered. Bank of Ireland decided that rather than reducing its standard variable rate, it would offer much better value options on fixed rates than it had heretofore. Now it is offering a substantially lower fixed rate of 3.6%. I am surprised at the inertia of customers in responding to the reductions of up to 1% that have been made available to them. I cannot fathom why there seems to be a reluctance to move from variable rates to fixed rates, even within the same bank. Many customers with quite small mortgages are happy to let them roll along. It seems that interest rate reductions of 0.5%, 0.75% or 1% do not represent a sufficient inducement to get them to do the paperwork to switch. The effect of the introduction of these options is interesting.

Deputy Shane Ross

Standard variable rates and fixed rates are very different creatures with different characteristics. Some borrowers who take out mortgages need variable rates, while some need fixed rates. It is not as if they can just switch from one comparable mortgage to another. In many cases, they do not switch because the fixed rates are not suited to their particular positions. I take it from what the Minister has said that he has given up any hope of getting Bank of Ireland to reduce its standard variable rate. I wonder what influence he has over the bank with his 14% shareholding. He did not answer the important question I asked. Does the fact that he has a 14% shareholding in Bank of Ireland and a shareholding of almost 100% in AIB mean that the banks are operating under different arrangements? Does he have greater influence over the operations of AIB as a result of the difference in the shareholdings? If so, does this affect competition between the two banks?

Deputy Michael Noonan

I do not have a role in the commercial decisions of either bank. The State owns 99.8% of AIB, vested in me, but that does not allow me to intervene in commercial decisions made by the bank. Similarly, the State's 14% stake in Bank of Ireland does not allow me to intervene in its commercial decisions. Obviously, I have a certain moral suasion role. An example of how it works was highlighted in response to the previous question in the name of Deputy Michael McGrath. The new practices Bank of Ireland was proposing to impose on customers in withdrawing money in its branches were totally out of line with our expectations. I issued a very strong statement and the bank reacted immediately. I have that influence. The fixing of interest rates is a matter for individual banks; it is not one for the Cental Bank or me. The answer is to have competition in the system.

That is why I want different products at different prices offered by different banks. I do not want in any circumstance to have the same set of products all priced evenly, as if that was to happen, there would be no competition at all. I would like to attract other lenders to the country on the mortgage side, but that is quite difficult because of the legacy of mortgages in arrears in a country where enforcement involves a long legal process. New banks are, therefore, reluctant to come.