I propose to take Questions Nos. 75, 281, 288 and 301 together.
While interest rates in Ireland remain higher than in many other European countries, the Central Bank has advised that trends show that they have been falling in recent years, providing benefit to consumers. For example, interest rates on fixed rate mortgages (excluding renegotiations) have fallen from 4.11% in December 2014 to 2.67% in July of this year. There have also been reductions in interest rates on loans to SMEs from 5.19% to 4.26% from Q1 2015 to Q1 2020, as well as reductions in interest rates on consumer loans (for example, from 8.13% to 7.08% on APRC consumer loans over the same period).
Nevertheless, it should also be noted that Irish loans, particularly with respect to Irish mortgages, can have different characteristics from those offered by other EU banks making direct comparison of headline mortgage rates inconsistent. For example, many Irish banks include incentives such as cash back offers, which reduce the effective Irish mortgage interest rate. Irish mortgages are also not subject to upfront fees typically charged by banks in other EU jurisdictions, and which can result in lower EU headline rates.
Nevertheless, there are a number of important factors determine the interest rates charged on Irish mortgages. These include operational costs, certain structural factors as referenced above (such as incentives offered), as well as the fact that pricing will reflect:
- credit risk and capital requirements which in Ireland are elevated due to historical loss experience;
- the level of non-performing loans which is higher in Ireland relative to other European banks (as provisioning and capital requirements are higher for these loans to reflect their higher risk and this in turn results in higher credit and capital costs for the Irish banks);
- there are lower levels of competition in the Irish banking market compared to other jurisdictions (however, it is noted that a new entrant has recently entered the residential mortgage market and that it is offering fixed rate mortgages at competitive interest rates).
The Central Bank has a range of measures to protect consumers who are taking out a mortgage. The consumer protection framework requires lenders to be transparent and fair in all their dealings with borrowers and that borrowers are protected from the beginning to the end of the mortgage life cycle; through protections at the initial marketing/advertising stage, in assessing the affordability and suitability of the mortgage and at a time when borrowers may find themselves in financial difficulties.
In particular, the Central Bank introduced of a number of increased protections for variable rate mortgage holders which came into effect in February 2017. The enhanced measures, which are provided for in an Addendum to the Consumer Protection Code 2012, require lenders to explain to borrowers how their variable interest rates have been set, including in the event of an increase. The measures also improve the level of information required to be provided to borrowers on variable rates about other mortgage products their lender provides which could provide savings for the borrower and signpost the borrower to the CCPC’s mortgage switching tool.
The Central Bank also introduced additional changes to the Consumer Protection Code in January 2019 to help consumers make savings on their mortgage repayments, provide additional protections to consumers who are eligible to switch, and facilitate mortgage switching through enhancing the transparency of the mortgage framework.
Ultimately, however, the price lenders charge for their loans is a commercial matter for individual lenders. Nevertheless, I will continue to work with the Central Bank and also engage with lenders to encourage, within a framework which seeks to maintain overall financial stability, greater price and other competition in the mortgage market, both for new and existing borrowers. It is, therefore, a welcome development that a new residential mortgage lender has recently entered the market and it will be of benefit to new mortgage borrowers and also to borrowers, in particular to borrowers who may still on a standard variable rate with the lender, who may wish to consider switching to a new lender.