The European Central Bank (ECB) sets monetary policy and official interest rates for the Eurozone as a whole and also plays a key role in the prudential supervision of European banks and the maintenance of the stability of the overall banking system in the context of the Single Supervisory Mechanism. It is a matter for each credit institution to set its own lending and deposit rates having regard to cost and competitive considerations and also to make its own lending decisions. Neither I nor the Central Bank have a role in prescribing the interest rates that commercial lenders may charge on their loans, including mortgages, or for deposits.
Part of the reason for the differential between Irish mortgage rates and those in other countries is the relatively large historical loss experience in the Irish market during the financial crisis and the related legacy issues of non-performing loans, many of which remain on banks' book. Banks are required to make adequate provisions for such loans.
Banks are also required to hold an adequate level of capital against mortgage lending. These capital requirements are calculated with reference to historical loss and default rates with the result that Irish banks are required to hold relatively more capital for new mortgage lending than many of their European peers, in some cases substantially more capital.
In addition to their capital requirements, banks are also required to build up additional capital to meet regulatory capital buffers such as the countercyclical capital buffer which is intended to ensure banks can withstand future adverse economic shocks.
The impact of these capital requirements is reflected in the interest rates charged for mortgages in Ireland.
Furthermore, the Irish banking system continues to hold a large amount of lower yielding tracker mortgages on their balance sheets and there is currently a high level of concentration in the market for new mortgage credit.
The Central Bank has introduced a number of changes to the Consumer Protection Code that are designed to help consumers make savings on their mortgage repayments; for example, provision 6.5 (g) of the Code now requires lenders at least annually to, inter alia, notify their variable interest (other than tracker) mortgage customers whether they can move to a cheaper interest rate as a result of a change in their loan to value interest rate band and, if the customer is permitted to move, to invite the borrower to contact the lender to discuss the matter. If the consumer is not permitted to move to a lower loan to value band with a lower interest rate, the consumer is nevertheless to be notified that he/she may be able to avail of a lower loan to value interest rate band from another lender based on an up to-date valuation of the property. It should also be noted that the Central Bank macro prudential loan to value and loan to income residential mortgage lending restrictions do not apply to switcher mortgages. More generally, the Code also requires lenders at least annually to provide to variable rate (excluding tracker) mortgage holders:-
- a summary of other mortgage products offered by that lender which could provide savings for the consumer at that point in time,
- a statement that consumers should keep their mortgage arrangements under review as there may be other options that could provide savings for the borrower and
- a link to the relevant section of the Competition and Consumer Protection website relating to mortgage switching or changing mortgage type.