Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

This is one of the most important economic Bills the House will debate in the current Dáil term. I do not say this lightly, as the fact of the matter remains there are 300,000 standard variable rate mortgage customers who are being charged way over the odds at rates that we now know are double the levels of elsewhere in the eurozone. On tonight's "Six One News", we heard that the European Commission had come out against any intervention by the Central Bank in the variable rates that are being charged. It will not surprise many in Ireland that the European Commission is backing the banks and not ordinary mortgage holders, but it is the job of the Government, including the Minister for Finance, to protect those mortgage holders who are still being charged excessive variable rates. With every month that passes, they must come up with more interest than anyone else in Europe. We will outline the reasons this is not acceptable and how the matter can be addressed.

This issue has been firmly on the political agenda since the end of March, when we tabled a motion during Private Members' time on the subject. Since then, the campaign for mortgage fairness has gained momentum and I acknowledge the work of Mr. Brendan Burgess, Ms Sarah Hogan and other members of the campaign for their tireless efforts in this regard. The debate on the public airwaves and in the print media has galvanised public opinion and has been an example of the power of political campaigning. There is greater awareness than there was a few months ago of the extent to which variable rate mortgage customers are being ripped off in Ireland.

Let us remember the scale of what we are discussing. There are 300,000 residential mortgage customers with variable rate mortgages in this country. Collectively, they owe €40 billion. Overall, a 1% interest rate cut across the board would save families €400 million every year. A 2% rate cut would provide a stimulus of €800 million to the economy in a 12-month period. This aspect of the debate is often overlooked. With every passing month that families pay sky high interest rates, they have less money to spend in the domestic economy. Their plight should be as important to the Government as is its determination to make the banks profitable again.

I repeat the view that I expressed in March to the effect that the variable rates being charged by the banks are not justified based on their cost of funds. In his address to the Oireachtas finance committee, the Central Bank Governor, Professor Honohan, accepted:

A widening of mortgage interest rate spreads over policy rates also occurred in the United Kingdom and in many euro area countries after the crisis but spreads have begun to narrow in the UK and elsewhere. Until recently, bank competition has been too weak in Ireland to result in any substantial inroads on rates.

Like all Deputies, I have been inundated with a large volume of correspondence, including e-mails and telephone calls, from people who are directly affected by this issue. They feel a sheer sense of frustration because, as banks have enjoyed reduced funding costs and record amounts of cheap funding from the ECB, ordinary families have not been able to benefit from same.

The banks' response to our raising of this issue was first to deny the existence of a problem and then to drop a few crumbs from the table. Despite the fact that variable rates in Ireland are more than 2% higher than the euro area average, the only bank to offer a straight cut in its variable rate has been AIB. This was announced before that bank's meeting with the Minister for Finance. Permanent TSB has offered a change in its pricing that leaves it still charging a 4.3% variable rate to borrowers above the 90% loan-to-value ratio. This is outrageous. The essential purpose of the meetings between the Minister and the banks in recent weeks was to reduce the exorbitant standard variable rates being charged by the latter. At the time, carefully placed media leaks indicated that variable rate cuts of 0.75% would be on the way over a period. It now looks like this will not happen and the Minister has been duped. For example, where is the Bank of Ireland variable rate cut? In essence, that bank is refusing to cut its inflated variable rate of 4.5% and is instead effectively trying to force existing customers to lock into a two-year fixed rate.

The banks have not met the test set for them by the Central Bank in its recent report on the mortgage market, which reads, "Greater transparency surrounding the variable interest rate policies operated by each bank would help in this regard." If anything, the pricing process has been made more convoluted, with KBC tying in a reduction in its rates for customers moving their current accounts to that bank. As matters stand, customers have been left bewildered as to why they are paying higher rates for their mortgages, given that European Central Bank, ECB, rates have fallen to an historic low. The latest retail interest rates published by the Central Bank on 12 June showed that the average rate in the euro area for a new mortgage was 2.02%. Current variable rates on new housing loans in Ireland averaged at 4.13% in the first quarter of this year. Many existing customers are paying even more.

It is important to put on the record the current rates that apply in Ireland for a variable rate customer with a loan-to-value ratio of between 80% and 90%: AIB's is 3.9%; KBC's rate for mortgage holders who move their current accounts to that bank is 4.3%; Ulster Bank's rate is 4.3%; Permanent TSB's is 4.2%; ICS, now known as Dilosk, has a rate of 4.35%; Bank of Ireland's rate is 4.5%; Danske Bank's is 4.95%; and ACC Bank, now Rabobank, has a rate of 4.4%. These rates are little changed from the rates that applied before the Minister, Deputy Noonan, met the banks. The main focus of their response has been to change their fixed rate offerings. In other words, existing standard variable rate customers continue to get a raw deal from the banks. In fact, the people who have gained the least from this initiative are those in negative equity or who have little equity in their properties. The irony is that those who most need assistance by way of an interest rate cut have not received one.

Why is it acceptable that the pricing of variable rate mortgages would be so out of line with market conditions? The essence of a variable rate is that it should vary in line with them. Are we really suggesting that, if those conditions deteriorated, the banks would have to be asked twice to increase their rates to take account of it? I do not believe so.

I watched the Minister for Finance on "Six One News" this evening. The most depressing aspect is that he seems to believe that the banks have moved enough on this issue. I got the distinct impression that he would like to close this file for good. Instead, he should revert to the banks and tell them that the response has not been adequate and that, fundamentally, they have not dealt with the key issue of variable rate mortgage pricing.

The lack of progress on the standard variable rate issue will be made worse in the next two years or so, as mortgage interest relief is due to end entirely at the end of 2017. This will particularly affect variate rate customers paying high interest rates.

Reducing fixed rates is not an adequate response for standard variable rate customers, as it may not be suitable for a large cohort of them. For example, Bank of Ireland will not allow existing customers to fix their interest rates for a period of less than two years. This comes at a price for them, as they may not be able to benefit from future rate reductions or lower rates from new market entrants, whom I hope will emerge even though there is no sign of any yet. Mortgage holders who want to sell their homes while on fixed rate mortgages could end up having to pay penalties for breaking their fixed terms early. Any person who is lucky enough to receive a lump sum from a redundancy or inheritance while on a fixed rate and wants to use it to reduce the balance on his or her loan may also be hit with a large financial penalty.

The variable rate product should be priced appropriately for customers. In simple terms, the issue has not been resolved. In effect, banks have openly defied the Minister.

This is why I believe moral persuasion on the banks will not in itself be enough. A legislative response is now needed. This evening, the Minister essentially encouraged customers to take up the fixed rate offer and made a prediction on the future direction of interest rates. In my view, this is not the role of the Minister for Finance. His job should be to get the best possible deal for this country's mortgage holders, rather than advising them to sign up to the fixed-rate products that the banks have now offered.

Our comprehensive legislation would apply to all entities providing, managing or administering mortgages. This is very important as it would bring in mortgages that have been sold to vulture funds. If the Central Bank concludes that a "market failure" exists under our legislation, it will be empowered with a range of tools to influence the standard variable rates that are charged, including the power to issue a specific direction to a lender. This process would have the distinct advantage of protecting customers of smaller lenders and families whose loans have been sold to overseas equity or vulture funds. Currently, there is absolutely nothing to prevent an existing financial institution or a US equity fund from increasing the rate of interest on a mortgage to 6%, 7% or 8% - this point is fundamental to understanding why this legislation is needed - and that is exposing every mortgage holder in this country to an unacceptable level of risk. It is a fact that the trend is for banks to dispose of their mortgage portfolios. They are increasingly disposing of them to so-called vulture funds, which are not accountable to anyone. We hope the legislation that is going through at present will deal with that issue. However, it will not deal with the issue of possible interest rate hikes, which needs to be addressed.

Under this Bill, the Central Bank will be required to carry out an assessment of the state of the mortgage market, taking account of 11 considerations including institution-specific factors such as the cost of funds, the weighted average cost of capital, the risk profile, the reasonable profit expectation and the proportion of market of each bank. It will also have to consider general market factors such as the ease with which borrowers can switch mortgages between lenders and the extent to which they are switching. If the Central Bank concludes that a market failure exists, this legislation will empower it with a range of tools to influence the standard variable rates that are being charged. For example, it will be able to direct a lender not to charge a rate which exceeds a specified minimum or maximum rate; a margin above the lender's cost of funds, as determined by the Central Bank; a margin above the ECB rate; or a proportion, for example, more than one third, above the average variable interest rate being charged in the market. Such interventions are common elsewhere in Europe.

This Bill is not simply a response to the current circumstances in the mortgage market. It is intended that it will bring about a permanent improvement in consumer protection for mortgage holders. The Court of Appeal ruling in the Millar case essentially means the courts have found that the law as it stands cannot be invoked by a mortgage customer who feels that his or her bank has hiked the standard variable rate to an excessive extent. Judge Hogan's earlier ruling that Danske Bank had acted incorrectly in raising its variable rate at a time when the European Central Bank was actively cutting its lending rates had offered a chink of light for mortgage customers, but this has now been comprehensively closed off. In essence, the law as it stands does not offer adequate protection to mortgage holders in this country. As I said earlier, this proposal would have the distinct advantage of protecting the customers of smaller and non-bank lenders and those who are exiting the market. Some 46,000 mortgages are now held by non-banks, of which 19,000 are in arrears and therefore in very vulnerable situations. Even in a generally well-functioning marketplace, there is need for measures that protect customers who are weak and vulnerable. While we hope the provisions of this Bill will never need to be implemented or used by the Central Bank on a widespread basis in the market, it is important to have powers on the Statute Book in case the Central Bank might need to use them.

This legislation has an important non-discrimination clause. Some banks are now engaged in a policy of making certain offers available to new customers only. Some of the banks moved on this issue in the recent round of announcements, but not all of them did so. In March of this year, I said I felt the banks' policies in this regard were damaging their own brands. I recently received correspondence from a Permanent TSB mortgage customer who was coming off a fixed rate. This person had received a letter offering three options: a variable rate of 4.5%, a two-year fixed rate of 7.25% or a five-year fixed rate of 8.75%. This is happening at a time when the same bank is offering new customers a chance to fix their rates at between 3.7% and 4% for two years or 3.95% for five years. Such a differential in the treatment of existing customers and new customers should not be acceptable to the Government, the Central Bank or anyone else. We believe banks should be prevented from doing this in the interests of fairness. For that reason, we are proposing that banks should be required to treat new and existing customers equally.

Banks must be required to open up the market for switcher mortgages in a meaningful way. They like to give the impression that they are willing to take on the mortgages of existing customers of other institutions, but the reality is that very few of them are actively involved in this side of the market. The responses given by all of them to the Joint Committee on Finance, Public Expenditure and Reform recently are evidence of this. We can infer from their refusal to provide figures on the number of switcher mortgages that have actually been completed that the number in question is absolutely tiny. We all know this is the case. This issue needs to be addressed. Fianna Fáil honestly believes this is the last opportunity before the forthcoming general election to deal with this issue by way of legislation in this House. We have been pressing this issue for many months now. Some progress has been made, but it has been very limited. It is unacceptable that the response from the banks, which has been minimalist in nature, has left many customers behind. The focus of our Bill is on variable rate loans. Other customers, including sub-prime mortgage holders and buy-to-let mortgage holders, are paying even higher rates of 5% or 6%. All of that underlines the fundamental need for this legislation to be enacted so that these powers are on the Statute Book. Fairness needs to be introduced to the mortgage market in Ireland to deal with the clear discriminatory practices that are being applied against up to 300,000 variable-rate customers. Such practices are not good enough and must come to an end.

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