Brian Lenihan Jnr (Dublin West, Fianna Fail)

The Deputy's question refers to the redemption fee or breakage costs applied by mortgage providers in circumstances that a customer seeks to break a fixed rate mortgage to avail of lower variable interest rates. At the outset, as much as fixed rate mortgages provide certainty and security to mortgage holders, it is clear that many fixed rate mortgage holders are tempted to switch for a better deal when interest rates are low. In circumstances that many households are faced with significantly increased financial pressures, the current environment of very low interest rates clearly highlights to many fixed rate mortgage holders the saving that would be available if they benefited from a variable interest rate.

Securing a better interest rate is only one part of calculating the benefits of switching. As the Deputy's question indicates while a fixed rate mortgage offers stability in monthly repayments, one of the biggest drawbacks is the prospect of a financial penalty incurred when the fixing period is broken. It is important to make the point that these redemption fees are also a feature of markets such as France and Germany where long-term fixing is the norm.

The issue of early repayment was analysed in detail in the report of the Mortgage Funding Expert Group established by the European Commission in its report published at the end of 2006. The expert group highlighted that from a lender's perspective if a consumer repays a mortgage loan earlier than scheduled the mortgage lender will not be able to generate the expected interest and fee income and therefore will incur a loss. If the mortgage lender has raised funding with a stated maturity and coupon specific costs will arise, the availability of an early repayment option to the mortgage borrowers, therefore, has a direct connection with the lender's profitability and therefore has a value and cost. If this value is conferred on the borrower the cost has to be borne by the lender.

Additional information not given on the floor of the House.

The expert group agreed that prepayment should be compensated and the compensation formula should be clearly established, transparent and easy to understand for consumers. A majority of the expert group believed that all relevant lender losses should be covered in order to ensure the provision of low cost loans. The European Commission committed in its White Paper on Mortgage Integration to assess the costs and benefits of different policy options for early repayment, including the level of compensation.

Under the domestic legislative framework interest-related charges are market determined on the basis of commercial considerations and neither I nor the Financial Regulator would have any statutory role in this matter. The Deputy will recognise that direct regulation of interest-related charges would represent a very significant intervention in commercial conduct which could not be justified unless there was significant evidence of substantial market failure. There are significant benefits for both individual householders and for the stability of the housing and financial sector overall from greater take-up of fixed rate mortgages. I do not believe, therefore that it is wise to embark on any course of action which could impact adversely on the cost and availability of fixed rate mortgages in the future.

In conclusion, I should add that I understand that the Financial Regulator's consultative consumer panel has shown a particular interest in the low take-up in fixed rate mortgages in Ireland as compared to other EU member states and has commissioned research on this issue. I share the panel's assessment that it is important for us to examine how we can ensure greater stability in our housing market in the future through greater stability and predictability in mortgage finance.

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