AN OIREACHTAS BILL aimed at driving down variable mortgage rates is misguided and could have several unintended negative effects.
That was the message driven home at a Dáil committee today by a senior figure at the Central Bank, who also suggested that variable mortgage rates in Ireland tend to be high because of the risk banks bear in lending.
Ed Sibley, the director of Credit Institutions Supervision at the Central Bank, said repossession rates in Ireland are low, which means that banks have to take on more risk.
He also said that the new bill could warp rates and result in more high-risk lending not being priced properly.
Variable mortgage rates have caused considerable controversy in the last year or so. While variable mortgage rates in the Republic have been slowly sliding over the past year as the banks start delivering profits again, the average rate still stands at about 3.6%.
That compares to roughly 2% for new business across Europe, where lenders have been enjoying rock-bottom funding costs.
Recently a bill was proposed by Fianna Fáil would give the Central Bank powers to cap variable mortgage rates, with the party’s stated aim to essentially force rates down.
Variable rates can rise or fall depending on wholesale interest rates, which are ultimately set by the European Central Bank (ECB).
If the ECB rate rises, a bank can raise the interest rate on their customer’s mortgage, and vice versa. However, the bank is not obliged to pass on any fall in the ECB rate to its customers.
This is different to a tracker rate, which does directly track the ECB rate. A tracker rate is set at a fixed level above the ECB rate, for example the ECB rate and one percentage point, and tracks any rises or fall in the official rate.
There was traditionally little difference between the two, however after the crash, and particularly in the last few years, the ECB has cut its rate to record lows. This means that tracker mortgages are also historically cheap, and banks are losing money on them.
However, in a statement to the joint committee on finance, public expenditure and reform today, Ed Sibley, the director of Credit Institutions Supervision at the Central Bank, argued against the bill.
“European Banking Authority stress-test data shows that Ireland’s mortgage default rate is more than 10 times higher than many other Eurozone and European Union countries,” he said.
“In other words, mortgages are higher risk in Ireland than in the majority of those countries with which mortgage rates are compared.
“The stress test data also shows banks operating in Ireland need to hold significantly more capital for Irish mortgages on average per euro of mortgage lending than other European banks, with associated higher costs, and hence mortgage rates.”
Sibley also said that banks find it difficult to repossess properties in Ireland compared to other EU countries, which makes it more risky for them to lend.
He said that the low-level of repossessions makes it uncertain for banks as to how easily they can get back collateral from borrowers.
“Cross-country comparative research shows that increased recovery time is associated with lower availability of credit, and higher interest rates,” he said.
Sibley added that the proposed bill may “not only be unsuccessful but runs the risk of being counter-productive”.
“It is essential that banks have sustainable business models that take into account the risks that are inherent in their lending practices,” he said.
“There is a risk that capping interest rates will result in an under-pricing of credit risk, as was experienced in Ireland and internationally to such dangerous effect in the past.”
He added: “Were this legislation to be introduced, lenders may adapt their credit standards and offer variable mortgage loans only to new customers with a low risk profile, ultimately reducing credit availability.
“Lenders could also raise interest rates on other loans, and increase fees and commissions, in order to maintain or achieve sustainable capital generation.”
Sibley also said that with regard to the interest rates charged on existing variable rate mortgage loans “are subject to existing contracts and contract law, which only a judge could override, not a public body like the Central Bank”.
“We are also concerned about the extension of the (Central Bank’s) statutory functions to encompass the regulation of competition, which is a function already carried out by the Competition and Consumer Protection Commission.”