Barry Andrews (Dún Laoghaire, Fianna Fail)

I thank Senator Healy Eames for raising this important matter, to which I am replying on behalf of the Minister for Finance. I will begin by addressing the Senator's concerns for those who may fall into arrears on their mortgages and on the supports available to them. I will then address the issue of fixed rate home loan agreements and the role played by the Government and the Financial Regulator in this regard.

It is obviously most desirable that as few people as possible fall into arrears with their mortgages. One of the ways of achieving this is to ensure mortgages are affordable in the first instance. Successive budgets since 2006 have increased the level of mortgage interest relief available to first-time buyers to refocus this relief towards home owners who are in most need of assistance.

The Minister for Finance has consistently highlighted the need for responsible behaviour by both borrowers and lenders and, in particular, the need to factor in to their financial decision making the effects of potential future changes in economic and financial conditions. In early January, the Financial Regulator published tips on its consumer website www.itsyourmoney.ie to help consumers to manage on less money. This follows on from consumer research conducted by the Financial Regulator in which more than one quarter of respondents indicated that they had experienced a drop in income in the past six months. More than two thirds of respondents stated they were reacting to the recession by making some change to their personal finances, for example, through budgeting more carefully, cutting down on day-to-day spending or reducing their credit card spending. The consumer director of the Financial Regulator, Ms Mary O'Dea, recommended that the priority for consumers should be to try to live within their budgets. The Financial Regulator's practical money tips are aimed at helping consumers live on less, save more for emergencies and start off the year on a good financial footing.

In terms of support for payment of mortgages, the mortgage interest supplement, administered by the community welfare service of the Health Service Executive on behalf of the Department of Social and Family Affairs, provides assistance in respect of the interest paid, where the mortgage relates to a person's principal private residence in the State. Anyone experiencing difficulty in repaying a mortgage or other loan should discuss the matter with the loan provider and seek appropriate financial advice without delay. People in debt or in danger of getting into debt can avail of the services of the money advice and budgeting service, MABS. The latter is a national, free, confidential and independent service. In 2009, almost €18 million has been provided to assist MABS with its workload.

It is a particular priority of the Government to ensure, as much as possible, that difficulties in respect of mortgage arrears do not result in legal proceedings for home repossession. Home repossession should be, and generally is, the last resort for the lender. The preferred method of dealing with arrears cases should be early intervention. In late 2008, the Financial Regulator carried out an examination of procedures for handling arrears and repossessions across credit institutions and other mortgage lenders. This examination focused on residential mortgages and confirmed that mortgage lenders generally have fair and reasonable procedures in place to deal with arrears and repossessions. The Financial Regulator has written to all regulated mortgage lenders with feedback from the examination, setting out best practices identified.

The finalised recapitalisation scheme announced on 11 February includes a new code of conduct in respect of mortgage arrears. This code came into force on 27 February and applies to mortgage lending activities to consumers in respect of their principal private residence in the State and is mandatory for all mortgage lenders registered with the Financial Regulator. Under the mortgage arrears code, where a borrower is in difficulty the lender will make every reasonable effort to agree an alternative repayment schedule and will not commence legal action for repossession until after six months from the time arrears first arise. In addition, as part of their recapitalisation scheme, the two banks concerned, AIB and Bank of Ireland, will not commence court proceedings for repossession of a principal private residence until after 12 months of arrears appearing. This is subject to the customer continuing to co-operate with their bank.

Moving to the specific question of fixed rate mortgages, the Minister for Finance has no function in setting interest rates, including fixed rates. His function is to provide an appropriate and robust legislative framework for regulation of the financial services sector, with a particular focus on the consumer. The choice of mortgage product ultimately rests with the consumer in light of the terms and conditions that their lending institution offers. The decision of borrowers is influenced by factors such as their personal preferences and their own assessment of the relative merits of fixed and variable rate mortgages.

Generally mortgages are for long periods. To some consumers a fixed interest rate on a mortgage offers peace of mind in that the borrower benefits from certainty regarding the cost of their mortgage and does not need to be concerned with changes in mortgage interest rates and, accordingly, he or she can budget more confidently. Interest rates charged by banks generally vary in line with the base rate fixed by the European Central Bank, ECB, from time to time. Where a bank offers a fixed rate over a certain period it incurs additional costs in obtaining fixed or other funding in respect of the loan over the period. The additional costs will reflect both the market view of future trends in interest rates for the period and the fact that longer-term deposits generally attract higher interest rates than short-term deposits.

In addition, where a consumer changes from a fixed interest rate contract to a variable rate contract before the end of the term for which the interest rate was fixed, there is an associated cost to the lender. In circumstances that lenders were prohibited from passing on this cost to borrowers switching to variable rates, this cost could increase the price and reduce the availability of fixed rate mortgages. Those on fixed rate mortgages have the option of switching to variable rate mortgages under the terms of their existing fixed rate agreement.

The Minister for Finance is satisfied that the current level of safeguards available as outlined above is sufficient to protect such consumers at this time. He is also cognisant of the possibility that there may be additional costs to borrowers, in general, and less choice of products available should lenders experience a reduction in revenue as a result of the introduction of measures to allow borrowers who entered fixed rate home loan agreements to renegotiate new rates at current variable or fixed mortgage rates. Therefore, the Minister for Finance currently has no plans to introduce such measures. However he will keep the situation under review in consultation with the Financial Regulator.