Regulation that keeps mortgage rates high for Irish homeowners defended by Central Bank

Banks blame Central Bank of Ireland rules that require them to put aside more capital when issuing a mortgage than their counterparts in the rest of the eurozone.

This is seen as a legacy of the financial crash more than a decade ago.

In a submission to the Department of Finance’s Retail Banking Review, the Central Bank admits a recurring question is why homebuyers in Ireland generally pay higher interest rates for their mortgages than elsewhere in the European Union.

The submission said: “People ask whether these higher interest rates are justified and whether regulation is to blame – and if so, should it
be changed.”

The Central Bank said it had “given close attention to the question of whether the regulatory capital requirements that apply to mortgage lending may be overly stringent”.

The average rate on a new mortgage in this country was 2.73pc in May, according to the Central Bank of Ireland.

This is the second highest to Greece in the eurozone, where the average is 1.76pc.

The regulator’s submission said that its regulatory capital rules added between 0.3 percentage points and 0.5 percentage points to the mortgage rates in this country.

It said only a small part of this was driven by regulation, because banks would put aside capital to allow for the fact that some borrowers may not be able to repay their mortgage even if they were not forced to do so by regulators.

The Central Bank said in its submission that the capital amount that had to be set aside when a mortgage was issued reflected the likelihood that a borrower would stop paying back their mortgage loan.

It also reflects the amount that the bank is likely to lose if the borrower does stop paying.

Improved economic conditions and other improvements mean the likelihood of default has reduced, which is a “positive for the cost of borrowing”.

What a bank could lose if a borrower stopped paying was a huge issue during the financial crash, and its effects were continuing to be an issue, the Central Bank said.

“In general, therefore, the overall level of capital charges for mortgage lending in Ireland are appropriate,” the submission said.

There may be small room for less capital to be put aside, to the European discount interest rate, but this was likely to be relatively marginal, the regulator said.

Last month the European Central Bank raised its key refinancing rate by 0.50pc.

This is set to cost those on trackers.

Pressure is now mounting on lenders to resist hiking variable rates for the 200,000 homeowners on them because variables in this country are
so high.

Variable rates are among the most expensive in this country, with some charging up to 4.5pc.

Bank of Ireland said it was keeping fixed and variable rate offerings under review. 

AIB said it was keeping all its rates under review.

Permanent TSB said it could absorb the initial rise in ECB rates without passing the cost on to variable-rate borrowers, putting pressure on other lenders.

The move to hike rates by 0.50 percentage points will mean a family with a typical tracker is facing an extra €57 a month in repayments.

This works out at €685 a year in higher repayments.

This is based on a tracker of €250,000, with 25 years remaining, on a 1pc margin over the ECB rate.

More ECB rate rises are expected next month.

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