Noel Coonan (Tipperary North, Fine Gael)
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Question 8: To ask the Minister for Finance if he will request the consumer director of the Irish Financial Services Regulatory Authority to examine the extent to which banks have backed their fixed rate mortgages by long dated securities, in order to establish whether the penalty for switching from fixed rate commitments could be reduced. [12537/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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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.

Richard Bruton (Dublin North Central, Fine Gael)
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The Minister is missing the point of the question. The question was whether he would arrange an examination of the financial institutions to see to what extent they have entered into these long-dated security commitments that would justify them imposing these penalties of €20,000 for people to switch. My point is that with the taxpayer now underpinning much of the banking activity, if there is not reasonableness in these charges we should move to get rid of them and give some people relief.

If there is a genuine commercial penalty we can understand why that would be the case. We need to investigate our banks holding long dated securities because my impression is that long dated securities are almost impossible to get. I suspect that they are not holding them and that the justification for the penalty does not stand up.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I will raise the issue, but the consumer director is independent in these matters and has sufficient powers to investigate the matter on her own initiative. I understand that as she is already aware of the level of charges — and should the Financial Regulator feel that such charges do not represent recovery of funding costs — the cost structure can be fully investigated under section 149 of the Consumer Credit Act 1995. In those cases the charges would need to be approved by the Financial Regulator in advance.

The statutory presumption is that these breakage charges relate to the cost of funding the advance that is made to the borrower. Financial institutions use formulae for calculating these charges and the formulae contain parameters relating to the cost of the original fixed-rate loan and to the new or refunded loan.

The terms applying to the redemption of a fixed-rate mortgage held with a particular financial institution operating in the Irish market are as follows. The charge is applied to a fixed-rate loan where during the term of the fixed-rate period the full loan is repaid early, or a lump-sum repayment over the multiple of €1,200 per annum is made, or the loan is converted to a variable rate loan or another fixed-rate loan. In these circumstances the customer must pay a sum equal to the lesser of six months' interest charge or the economic breakage charge. There is a formula for the calculation of the economic breakage charge which is a multiplier of the redeemed amount multiplied by the original cost of funds less the current cost of funds multiplied by the time remaining until the end of the fixed-rate period and divided by 365.

Brendan Howlin (Wexford, Labour)
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That is clear.

Joan Burton (Dublin West, Labour)
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Would the Minister ask the director of consumer affairs in the Irish Financial Services Regulatory Authority to undertake an investigation of this? Like the previous question on shopping, what we are looking for is positive signals where a consumer is in a fixed-rate mortgage. The Minister must remember he told me yesterday that at the end of December last there were €147 billion in house mortgage finance in this country. I do not know whether he knows how much of that is in fixed-rate mortgages and for what duration. While everything is so flat and today's figures for the drop in spending are so bad, the Minister must identify actions which will show consumers and mortgage holders that there is hope for them, that something that has worked out as being very unfair in the current climate can be investigated and addressed fairly rapidly. That is how we will start to generate consumer confidence and get people spending again.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I share the concerns of other Deputies about this matter. We are all aware of individuals who see the very low interest rates that now obtain and contrast the high interest rates which they are locked into by agreement with the financial institutions. It is a matter for the consumer director to examine at all times, whether the strict legal position is being observed. I certainly will seek confirmation from her that such is the case.