Banks face growing pressure to cut home loan rates

The commercial banks are facing a mounting political clamour to cut their mortgage rates as Minister for Finance Michael Noonan presses the Central Bank to bring its influence to bear on the lenders.

Amid growing disquiet at the very high cost of variable rate homeloans, Mr Noonan will on Thursday ask Central Bank governor Patrick Honohan to seek action from the banks to deliver rate cuts.

The Central Bank has been insisting, however, that it will not seek the power to set rates as such a move would curtail competition in the market.

The European Central Bank brought its main interest rate close to zero last year but Irish banks failed to pass on the benefit to variable rate customers, who pay more than 4 per cent on average.

The banks’ refusal to yield has led to claims of discrimination as borrowers with tracker mortgages – whose rates are contractually tied to the ECB rate – are the beneficiaries of record low rates.

While all Irish banks received huge State aid in the crash, Mr Noonan said on Wednesday that there was general agreement across the political spectrum that the mortgage rates they charge were unfair.

The Minister’s meeting with Prof Honohan follows detailed correspondence on the matter between the Department of Finance and the Central Bank.

Responding to a Dáil question from Fianna Fáil finance spokesman Michael McGrath, Mr Noonan acknowledged that the Central Bank did not have the power to force banks to reduce their rates. He said, however, that the bank could seek to persuade them to do so.

Persuasion

The Minister said a previous deputy Central Bank governor had indicated that it could through the use of persuasion engage with specific lenders that appeared to set standard variable rates disproportionate to the their cost of funds.

Mr Noonan went on to say he would tell the governor of the views widely shared by all sides of the Dáil on the issue. “I will ask him to consider what influence the Central Bank can bring to bear to bring variable mortgage rates closer to the cost of funds.”

At a separate event in Dame Street, however, Central Bank chief economist Gabriel Fagan attributed the problem to the lack of competition and said the institution would not seek to discourage potential market entrants .

Asked if the Central Bank could bring any influence to bear, Mr Fagan cited remarks by Prof Honohan to an Oireachtas committee in which he said it would be “undesireable” for institution to seek to control rates.

“If we say that the problem is a lack of competition, the last thing you would want to do would be to deter companies from entering into the market by introducing such legislation,” Mr Fagan said.

Mr Noonan pointed out that new mortgages were available at much lower costs than the rates currently charged to existing borrowers but he hoped such borrowers would also gain from the general downward movement in rates across Europe.

‘Extortion’

Mr McGrath insisted the Central Bank was not just the prudential supervisor of the banks and their regulator but was also the consumers’ watchdog.

He attacked Bank of Ireland, saying its cost of funds was 1.15 per cent while its standard variable rate for existing customers was 4.5 per cent. “That is extortion by any measure.”

Amid concern that the current mortgage restructuring scheme is not broad enough, the Government is taking fresh steps to tackle the arrears debacle.

The question was considered at a meeting on Wednesday of the Economic Management Council, the powerful Cabinet subcommittee at which Taoiseach Enda Kenny and Tánaiste Joan Burton set the thrust of policy with Mr Noonan and Minister for Public Expenditure Brendan Howlin. They will again discuss the matter on Thursday.

One approach under discussion is to expand the current scheme in which people unable to pay their mortgages are given the option of paying rent to their local authorities who take ownership of the mortgage.

The view in Cabinet is that the scheme has not been nearly effective enough due to the restrictions in terms of the value of mortgages that applies.