Seán Haughey (Dublin North Central, Fianna Fail)

I thank the Senator for raising this matter, which I am taking on behalf of the Minister for the Environment, Heritage and Local Government. As the House is aware, the Government has a long-standing policy of facilitating the valid home ownership aspirations of as many households as possible. For many years now, mortgage lending by local authorities, backed by loan finance obtained by the Housing Finance Agency, has been a crucial means of supporting this objective. Through the agency, local authorities have been given access to loan finance at the keenest available rates, enabling them, in turn, to offer mortgage finance to borrowers who would otherwise be unable to obtain a mortgage. The applicable interest rate paid by local authority borrowers on fixed rates is set by reference to prevailing fixed interest rates at the time of a loan being drawn down.

The loans in respect of which interest rates in excess of 10% apply were issued by local authorities prior to 1991 and reflect the long-term costs of the funds to the Housing Finance Agency which prevailed at the time these loans were advanced. Rates on these loans were fixed for the life of the loan, generally 25 to 30 years. In 1989, despite the fact that a tranche of €123 million worth of 10% loans had already been issued and financed by the agency, the then Department of the Environment introduced the possibility of early repayment without penalty by local authorities, and thus by borrowers, allowing borrowers to refinance these loans in the private sector. This represents a significant concession having regard to the redemption penalties of up to six months' interest or more applied by commercial lending agencies in the event of early redemption of such mortgages. Early redemption without penalty means that the agency, which operates on a self-financing basis only, has had to bear the losses on such loans. In 2008, the cost of this to the agency was €2.4 million. The agency, through an appropriate reserves policy, has taken account of these losses in its risk management for many years.

In 2001, the position regarding high fixed-interest rates on local authority loans was reviewed in consultation with the Department of Finance. This review determined that a State subsidy to reduce such interest rates would not be appropriate, especially given the cost already being borne by the State where the holders of such loans availed of the option to re-finance in the private sector without penalty.

The Minister for the Environment, Heritage and Local Government understands the agency currently has around €33 million in 10% fixed-rate loans to local authorities on its books at 30 June 2009, with the majority having been advanced between 1986 and 1991. As the loans were generally over 25 to 30 year terms, typically they have less than ten years to go to maturity. While the agency does not hold specific information on the individual loans lent by local authorities, the Minister is given to understand that the average individual loan outstanding ranges between €10,000 and €25,000. Working from these figures, the repayment required to cover interest and capital ranges from €1,060 per annum to €2,650 per annum.

Long-term fixed rate mortgages are no longer available and the significant bulk of mortgage lending by local authorities is now at variable rates. Local authorities continue to offer a five-year fixed-rate option to persons taking out an annuity house purchase mortgage. The interest rate applied on these loans is 5.50% but will be cut to 4.40% from 1 July 2009. This compares with a variable mortgage rate of 2.25% since 1 June 2009.

Local authorities may allow borrowers with the shorter five-year fixed-rate mortgages to redeem early or convert to a variable rate within the fixed five-year period. However, in line with practice in the private mortgage market, the HFA requires that any prepayment of or conversion from a fixed-rate loan must compensate the agency for any losses that might arise. Breakage costs incurred by the agency and charged to local authorities must be matched by a charge by local authorities on borrowers. The breakage cost is based on the outstanding balance and the remaining fixed-rate period.

The Minister is satisfied that the arrangements in place strike an appropriate balance between the re-financing aspirations of borrowers with fixed-rate local authority loans and the extent to which the State can be expected to bear the associated costs.