Joan Burton (Dublin West, Labour)
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Question 28: To ask the Minister for Finance his views on the fact that monthly mortgage repayments have increased over the past year by approximately €120 per month on an average €300,000 mortgage and by approximately €200 per month on an average €500,000 mortgage; if he intends to implement measures to provide clear information for mortgage holders on the effect of projected future interest rate increases on their monthly payments; if his attention has been drawn to the fact that the European Central Bank has indicated the likelihood of further interest rate rises; and if he will make a statement on the matter. [25180/06]

Brian Cowen (Laois-Offaly, Fianna Fail)
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As the Deputy will be aware, there is a broad range of factors that determine the effect of changes in interest rates on individual loan repayments. These include, for example, the outstanding loan amount, whether the lending rate is fixed or variable, the length of time over which the increase takes place, the pass-through of interest rate changes to lending rates, the repayment term and the specific nature of the financial product involved. In reviewing the broad impact of projected increases in interest rates on households, account must also be taken of such factors as private sector savings levels as any increase in interest rates will obviously have beneficial effects for savers, as well as the broader macroeconomic climate comprising strong employment and incomes growth and continuing robust performance of the economy overall.

As far as the provision of information by mortgage lenders is concerned, mortgage providers are specifically obliged under the Consumer Credit Act 1995, to inform borrowers of the effect on the amount of their repayment instalments of a one percentage point increase in interest rates in the first year of their mortgages. This is intended to ensure that consumers, when making such a significant borrowing decision, are properly informed regarding the impact that changes in the cost of servicing the loan will have on the household budget over time.

A further strengthening of the regulatory framework will be achieved through the introduction of the financial regulator's proposed consumer protection code. This code will place obligations on regulated entities that provide mortgages to act in their customers' best interests by ensuring that they seek appropriate information about a consumer so that they know and understand their customers' needs. Providers must also ensure that mortgages are suitable to each individual consumer's circumstances. These obligations will be additional to the statutory prior information and warnings required under the Consumer Credit Act 1995.

The financial regulator has also developed a number of specific initiatives to help consumers make informed choices in terms of their financial decisions, including those on mortgages. As the Deputy will be aware, mortgage lending practices are closely supervised by the financial regulator, with appropriate stress testing of borrowers' ability to meet their obligations as the interest rate environment changes.

As far as the level of mortgage interest rates is concerned, it is important to make the point that Ireland's euro area membership, along with the high degree of competition in the Irish mortgage market, fostered by new entrants, has produced a low interest rate environment for Ireland relative to its historical experience. A competitive market benefits consumers through increased choice, lower prices, better service and a wide range of competitively priced products aligned with the personal needs of individual borrowers.

It is a matter for each individual to judge the level of debt that is appropriate to his or her circumstances. While the pattern of mortgage growth and associated debt in the economy is supported by a range of fundamental factors such as growing employment, rising incomes, favourable demographics and low inflation and interest rates, the Central Bank has highlighted the need for borrowers and lenders to take account of the current low level of interest rates and that this situation cannot continue indefinitely. I share the view that borrowers and lenders need to factor into their financial decision-making the prospective impact of potential changes in the future economic and financial environment.

Joan Burton (Dublin West, Labour)
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Is the Minister aware of the considerable stress experienced by young home purchasers and people intending to buy a home? Is he aware that the European Central Bank has indicated it intends to allow interest rates to rise on a quarterly basis by as much as 0.25%, which would mean an increase of 0.5% for each six months in the coming year? Does he agree that the impact of that on most young home owners with mortgages of between €300,000 and €500,000 will mean an extra monthly repayment of between €100 and €150, depending on the term of the mortgage?

Does the Minister appreciate the stress suffered by many people who are borrowed up to the gills with house mortgages, credit card loans and loans for furniture for their new homes? The stress is caused by the fact that they have no safety cushion to enable them to absorb huge increases in mortgage payments. Does he recognise that if the mortgage rate continues to rise the amount of cash that can be made available for mortgages will be reduced by €100,000 for first-time buyers? Many first-time buyers obtain loans of €300,000 but if interest rates keep rising they will be able to borrow less. Does the Minister heed the warning by Mr. Jean-Claude Trichet of the European Central Bank to the Irish Government about rate increases?

Brian Cowen (Laois-Offaly, Fianna Fail)
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Mr. Trichet has been nothing but complimentary about the performance of the Irish economy at every meeting I have attended of either ECOFIN Ministers or euro area Ministers. Future interest rate policy is a matter for the European Central Bank and is not something on which I comment as a matter of policy. The European Central Bank has been excellent in its management of interest rate policy and the stance Mr. Trichet and other governors of the bank have taken has ensured the exchange rate credibility of the euro has not been undermined.

Rising rates obviously have an impact on mortgage holders. The Central Bank's recently published financial stability report concluded that a range of fundamental factors, such as growing employment and incomes, low inflation and interest rates have underpinned the pattern of mortgage growth and associated debt levels in the economy. Interest rates remain at low levels compared with any period in our recent economic history. For example, an increase of one percentage point in the current level of mortgage interest rates to approximately 5% would still compare favourably with average mortgage interest rates of 8.5% during the 1990s.

The maintenance of low inflation through the setting of an appropriate level of interest rates for the euro area by the European Central Bank benefits all consumers and preserves the real value of incomes and savings. The most recent financial stability study published by the Central Bank also emphasises the importance of responsible behaviour by borrowers and lenders in the form of factoring into their decision-making the prospective impact of potential changes in the future economic environment. In its recently quarterly bulletin the Central Bank warns that credit continues to grow very strongly, with mortgage credit accounting for a large part of this. I share the Central Bank's assessment of the importance of maintaining financial and economic stability.

The stability report to which I referred, which was published last autumn, showed the trend for mortgage repayments for first-time buyers over the past 15 years within a range of approximately 23% to 33% of household disposable income on a national basis. Irish house buyers benefit from a range of supporting factors, including healthy income growth, low income tax rates and relatively low level of interest rates by historical standards. Affordability is also supported by the strength of the economy, record employment levels and relatively high savings rates. The expected shift in the interest rate environment will impact on affordability which, together with the large increase in new housing supply, should support equilibrium in the market. It is important we present the results in that context.

Banks are required to stress-test at a rate above existing rates. It is also in the interests of financial institutions to have good loan books as that determines profitability in the longer term. The growth in credit is a matter for the Central Bank, particularly through its participation in the European Central Bank where interest rates are set. From the point of view of the borrower and the investor, the function of Government is to provide an appropriate legislative framework of regulation of the financial services sector that is comprehensive and robust. I am satisfied that, with the progress made in recent years, especially in the establishment of the financial regulator, with a particular focus on the interest of the consumer, we have such a framework in place.

Joan Burton (Dublin West, Labour)
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On what planet is the Minister living? He talks about low inflation rates when house prices have risen by an astonishing amount — far in excess of building cost inflation — because there is incredible profiteering in land values and house prices by the construction sector. I remind the Minister of what Mr. Trichet said last week in reply to a query from a colleague of the Minister's, Eoin Ryan MEP, who is also a Member of this House. He said management of housing markets was the business of the EU member states. Does the Minister agree? He also said there was a need to incorporate prudential warnings and messages that combined with decisions taken at EU level into the economic cycles of EU member states.

Does the Minister understand the nervousness people feel? The Taoiseach asked us a couple of months ago to be kind to the banks. The Minister and the Taoiseach are never done talking up the construction industry but do not seem to have any concern for people who are anxious to try to afford a house. Affordability is moving further away from them and the Minister is heaping fuel on the bonfire.

Brian Cowen (Laois-Offaly, Fianna Fail)
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The planet on which I am living is the one that contains the country that has seen real interest rates, taking inflation into account, at historically low levels going back over 60 to 70 years.

Joan Burton (Dublin West, Labour)
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That was a couple of years ago. House prices are now rising at a fabulous rate.

Brian Cowen (Laois-Offaly, Fianna Fail)
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I want to reply to the Deputy's question. The planet on which I live——

Joan Burton (Dublin West, Labour)
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I am talking about now and the future.

Séamus Pattison (Carlow-Kilkenny, Labour)
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The Minister without interruption.

Joan Burton (Dublin West, Labour)
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The Minister is like Oisín, always looking back at Tír na nÓg.

Brian Cowen (Laois-Offaly, Fianna Fail)
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I am not.

Joan Burton (Dublin West, Labour)
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We want to live now and in the future.

Brian Cowen (Laois-Offaly, Fianna Fail)
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The Tír na nÓg in which the Deputy lived before 1997 had an unemployment rate of 10% and working people's average industrial wage was €11,000 lower. The Deputy should not give me lectures on her Tír na nÓg. The future for this country would be best provided by a Government which provides——

Joan Burton (Dublin West, Labour)
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The Minister is like Oisín and Niamh——

Brian Cowen (Laois-Offaly, Fianna Fail)
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The Deputy is making stupid sound bites.

Joan Burton (Dublin West, Labour)
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Will the Minister talk about the future for our young people?

Brian Cowen (Laois-Offaly, Fianna Fail)
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I am talking about the future — the future which has created 0.5 million jobs since we returned to office and the future which is making sure we now have a greater capacity for construction than was the case when the Deputy's party was in office. The Deputy has being doing as much as she can on the ground which has been debilitating against progress in providing more housing despite her claim.

I understand that if there are interest rate increases, it affects affordability. However, many factors impact on people's ability to finance mortgage repayments. They include income levels, the income tax regime and the current interest rate. Irish earnings and employment levels have increased significantly since 1997. There has been a 56% increase in the average industrial wage over that period and employment has risen by more than 0.5 million jobs. Interest rates are much lower than in 1997. I can go back to 1993-95 when the Deputy's party was in Government and the real interest rate was 9% higher than the inflation rate. I can go back to those times. I was a Member of this House.

Joan Burton (Dublin West, Labour)
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That was the legacy of the Government under Albert Reynolds.

Brian Cowen (Laois-Offaly, Fianna Fail)
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The changes to the income tax regime since 1997 — the Deputy's party halted reductions in tax for workers — mean that the average tax rate has been reduced at all income levels. After the last budget I brought in, the average tax rate for a single person on the average industrial wage will be 15% as compared with more than 27% in 1997.

Joan Burton (Dublin West, Labour)
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In those days nurses could afford a house which they now cannot.

Brian Cowen (Laois-Offaly, Fianna Fail)
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A single PAYE payer on the average industrial wage has seen his or her after tax income increase by approximately 44% in real terms since 1997 of which approximately half is due to tax reductions. The last factor influencing repayment ability is the interest rates available to the market. At present mortgage interest rates are approximately 4% down significantly from the rates of 7.1% to 8.85% which prevailed before we came into office. However, the prospect that interest rates are likely to be higher over the medium term with obvious implications for the burden on repayments should be kept firmly in mind by borrowers.

On the issues which affect affordability, we are in a better position now than when the Deputy's party was in office. The policies we have pursued will continue to bring an ability for people to repay on the basis of the policies we are implementing.

Joan Burton (Dublin West, Labour)
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People have 40 year mortgages.

Brian Cowen (Laois-Offaly, Fianna Fail)
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The Deputy keeps interrupting. When the objective facts are put on the table, the Deputy keeps interrupting. One does not win the argument by interrupting.

Joan Burton (Dublin West, Labour)
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The Minister has not dealt with the objective facts. There has been a huge rise in prices.

Brian Cowen (Laois-Offaly, Fianna Fail)
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I listened respectfully to what the Deputy said and the questions she asked. The minute I try to answer them and the Deputy finds she might lose the argument, she starts to shout me down.

Joan Burton (Dublin West, Labour)
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I am not losing the argument. The Minister is not answering the argument.

Brian Cowen (Laois-Offaly, Fianna Fail)
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It is infantile behaviour.

Joan Burton (Dublin West, Labour)
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The Minister is not answering the argument.

Brian Cowen (Laois-Offaly, Fianna Fail)
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I have answered all the arguments the Deputy put.

Joan Burton (Dublin West, Labour)
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The Minister did not answer any of them.

Brian Cowen (Laois-Offaly, Fianna Fail)
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I have answered all of them. The Deputy did not like the answers. That is the problem.