Brian Lenihan Jnr (Dublin West, Fianna Fail)

As the Deputy will be aware, fixed rate mortgages can be regarded as a form of insurance against interest rate changes as they provide certainty and security for borrowers regarding the level of their repayments. As mentioned in the Deputy's question, in circumstances where many households are faced with significantly increased financial pressures, the current environment of very low interest rates highlights to fixed rate mortgage holders the saving that would be available if they benefited from a variable interest rate. It is clear, therefore, why many fixed rate mortgage holders are anxious to switch to secure lower repayments. However, when a borrower signs a fixed rate mortgage contract with a mortgage provider, the lender, in turn, enters an agreement to borrow the money at an agreed rate and it must repay the money at this rate. There will be a cost to the institution if the fixed rate agreement is terminated before the end of the agreed term. This gives rise to the redemption fee charged in such cases.

In the House on 26 March I undertook to raise the concerns about the level of redemption fees with the consumer director of the Financial Regulator which has a statutory mandate to safeguard customers' interests. At the beginning of April my Department wrote to the consumer director to request confirmation that redemption fees charged for switching from fixed rate mortgages only covered funding costs and that no other costs were included. To date, the Financial Regulator has been able to confirm to my Department that all mortgage lenders have responded and provided the formula they use when they calculate the early redemption fee that applies to fixed rate mortgages. The Financial Regulator is awaiting independent verification by an actuary that the fee charged by a number of lenders recoups only the costs incurred by the lenders when they finance the fixed rate mortgage. However, the verifications received show that the formulae applied by the relevant lenders seek to recoup the loss to them arising from the early redemption of the fixed rate mortgage and do not seek to apply a penalty charge to the borrower.

The Financial Regulator is also examining whether any other costs are being charged such as administrative fees. Any such charges may be subject to approval by the Financial Regulator under section 149 of the Consumer Credit Act 1995 and will be examined further in that light. To date, the responses indicate that most lenders do not levy additional charges in the case of early redemption of fixed rate mortgages. Additional information not given on the floor of the House. The Financial Regulator has advised that further analysis may be necessary once all the information is received and reviewed. Should the remaining analysis by the Financial Regulator indicate that further consideration of this issue is required, it will be carried out.

The Government has put in place a number of important initiatives to assist borrowers who are in difficulties. These include the Money Advice and Budgeting Service which is developing a joint protocol with the Irish Banking Federation to ensure effective co-operation when dealing with debt problems of personal debtors. In addition, the mandatory code of conduct for mortgage arrears requires that when a borrower is in difficulty, the lender shall make every reasonable effort to agree an alternative repayment schedule. Under the code, consideration should be given case by case to alternatives such as deferral of payments, extending the term of the mortgage, changing the type of mortgage, and capitalising arrears and interest. In any case, lenders will not commence legal action for repossession until six months after the arrears arise. As part of the subscription agreement for their recapitalisation, Bank of Ireland and AIB will not commence court proceedings for repossession of a principal private residence until 12 months after the arrears appear when the customer continues to co-operate with the bank.

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