Seanad debates

Wednesday, 24 June 2009

7:00 pm

Photo of Pearse DohertyPearse Doherty (Sinn Fein)
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Cuirim fáilte roimh an Aire Stáit, an Teachta Haughey.

I wish to refer to the hundreds of customers of Donegal County Council who took out housing loans prior to 1991 and are paying fixed interest rates in excess of 10% on those loans. A total of 973 individuals and families have loans from the county council and 242 of them are being charged interest in excess of 10%. As already stated, all of the latter were taken out prior to 1991 when one was obliged to take on a loan with a fixed interest rate for a period of between 25 to 30 years. Some of those involved are only 19 years into the term of their loans and have a further ten or 11 years left to go.

As of 1 July next, local authorities will be in a position to charge interest to borrowers at the current variable rate of 2.25%. As a result, there is a need to consider the cases of the 242 people who are paying interest at a rate in excess of 10% and also the remaining 700. We know that the latter are not paying interest at a rate of 10% or more. However, we are not sure whether they are paying 7%, 8%, 9%, 9.5% or whatever. If they are paying interest at a rate that is above the current variable rate, then it is obvious they are paying too much.

Many Senators have been criticising the banks - I am sure the Minister of State feels the same sense of anger towards them - and other financial institutions for not passing on interest rate reductions. In this instance, however, a local authority which comes under the direct authority of the Dáil and the Minister for the Environment, Heritage and Local Government is charging customers in Donegal high rates of interest. It must be remembered that those to whom I refer could not obtain loans from the mainstream lending banks - one of the conditions people must satisfy before they can apply for local authority housing loans. It is not acceptable that they are being charged interest at a rate in excess of 10% by an agency of the State.

The Minister for the Environment, Heritage and Local Government has allowed customers of the local authority to remove themselves from the situation in which they find themselves if they are in a position to refinance their loans in the private, mainstream banking market. However, the difficulty is that to apply for such loans in the first instance, they had to have been refused loans by building societies or banks. The local authority scheme was their final option. Many of these people are social welfare recipients and are not in a position to pay back their loans. There is a concern - none of us would like to see this happen - that they may enter the sub-prime landing market and that an increased trend of house repossessions might result.

Legislation must be brought forward to enable local authorities to allow their customers who are on high fixed interest rates to refinance with those authorities and avail of the variable rate of 2.25% on offer to customers who are applying for loans at present. We must show compassion towards the people to whom I refer. I am sure this problem is not exclusive to Donegal and that it applies across the State. There are probably many hundreds if not thousands of people who are affected.

The Government last reviewed the issue of high fixed interest rates in 2001. At that stage, it decided that a State subsidy to reduce such interest rates would not be appropriate. In light of current events and concerns relating to sub-prime lenders, house repossessions, the economic downturn and the pressure being exerted on families, surely the Government cannot stand over an arm of the State charging some of its customers interest rates in excess of 10%. We do not know if the actual rate being charged is 12%, 15%, 18%, 19% or whatever and I would like the Minister for the Environment, Heritage and Local Government to provide details in this regard at a later date.

Photo of Seán HaugheySeán Haughey (Minister of State, Department of Education and Science; Minister of State, Department of Enterprise, Trade and Employment; Dublin North Central, Fianna Fail)
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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.

Photo of Pearse DohertyPearse Doherty (Sinn Fein)
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I thank the Minister of State for his reply. Perhaps he might bring a number of points to the attention of the Minister of State with responsibility for housing, Deputy Finneran. All recipients of these loans in excess of 10% should be informed of mechanisms to re-finance in the private sector, if they have not already done so, and they should be assisted in doing that because many of these people do not know this facility is available.

For the many who will be refused by the private banks and lending institutions, we need to find a way for the local authorities to allow them to re-finance. The Minister of State said in his reply that the Department was not aware of individual situations. This is one example: €17,000 borrowed, €32,000 repaid and still there is €10,000 left to repay. That means the customer of Donegal County Council in question will pay well in excess of 100% of what he or she originally borrowed. The problem is that such a person will not be able to re-finance in the private sector, so there is still an anomaly there that needs to be addressed. I should appreciate it if the Minister of State, Deputy Haughey, would bring that to the attention of the Minister of State, Deputy Finneran.

Photo of Seán HaugheySeán Haughey (Minister of State, Department of Education and Science; Minister of State, Department of Enterprise, Trade and Employment; Dublin North Central, Fianna Fail)
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The Senator's contribution is very helpful. I am aware that the Minister of State, Deputy Finneran, in particular, is very innovative in the way he looks at all these issues. He has taken up his post with an open mind on how to improve matters, particularly the first point made by the Senator about an information campaign. I am sure something could be done in that regard, but obviously this is a matter for the Minister of State and I will bring the Senator's comments to his attention.