Willie Penrose (Longford-Westmeath, Labour)
Link to this: Individually | In context

Question 85: To ask the Minister for Finance if he will take steps to request the various financial institutions to facilitate without penalty people who are on fixed rate mortgages with the particular institution to transfer to variable rate mortgages particularly in view of the financial and economic circumstances, whereby people's salaries are being reduced or the number of days they are working each week is being reduced; if his attention has been drawn to the fact that some financial institutions have permitted their clients a change without penalty to a variable; if same will be discussed with all institutions who provide mortgages that this is appropriate in the current circumstances; and if he will make a statement on the matter. [14027/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
Link to this: Individually | In context

The Deputy's question refers to the redemption fee applied by mortgage providers in circumstances that a customer seeks to break a fixed rate mortgage. Mortgage lenders in Ireland generally seek to recover costs of funds when a borrower with a fixed rate mortgage agreement seeks to terminate the agreement some time before the term agreed. Traditionally redemption fees were articulated with the institution specifying that a given number of months interest would apply. Overtime, they have generally moved towards a mechanism which reflects the difference between the contracted rate and current market rates applied to the amount outstanding for the remaining fixed period. Where a redemption fee is payable on a housing loan the mortgage agent has to inform the consumer about it at the outset.

Compensation sought by the lender reflects the cost to the institution of having ensured the availability of funds on the capital market at a certain cost, as against selling them on at a related price. Institutions fund the fixed rate agreement through funding on markets, generally through interest rate swaps. This allows them to hedge their exposure to interest rate fluctuations. Where the borrower seeks to repay the loan before the contractually agreed fixed term in an environment where interest rates have declined, the institution is exposed to re-investment risk, i.e., it will be unable to re-lend the funds at a rate related to their cost, due to intervening market fluctuations.

Ireland is relatively unusual in the EU context in that borrowers have an absolute legal right to repay their loan early as set out in Section 121(1) of the Consumer Credit Act 1995. However Section 121 goes on to recognise that while a consumer will not be liable to pay an early redemption fee with respect to a variable rate loan, this exemption from redemption fees does not apply where the rate of interest is fixed or is fixed for one year. The Deputy may wish to note that as part of the preparations for the EU White Paper on Mortgage Market Integration, the Mortgage Industry and Consumers Expert Group agreed that lenders should receive a compensation when a consumer repays his or her fixed rate loan earlier than at its contractual termination.

The Financial Regulator has advised my Department that there had been a recent issue involving an institution which allowed, without charge, a number of customers to switch from fixed to variable rate mortgages but this practice was discontinued as the number of customers, and the cost, increased substantially. 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 that it would be wise to embark on any course of action which could impact adversely on the cost and availability of fixed rate mortgages in the future.