Ciarán Lynch (Cork South Central, Labour)
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Question 233: To ask the Minister for Finance if it is his intention to make provision to assist fixed rate mortgage holders who are required to pay a substantial penalty when changing to a variable rate mortgage; and if he will make a statement on the matter. [15925/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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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 obtaining the 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, which was published in December 2007, the Mortgage Industry and Consumer 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.

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 mortgage and it would not be advisable to embark on any course of action which could impact adversely on the cost and availability of fixed rate mortgages in the future.

On 26 March 2009, I undertook, in this House, to contact the Consumer Director of the Financial Regulator on the subject of customers who wish to switch from a fixed rate mortgage. On foot of that my Department has contacted the Financial Regulator to request confirmation that the redemption costs for switching from a fixed rate mortgage cover funding costs only and that there are no other costs included in these charges. The Financial Regulator has confirmed to my Department that it is looking into this matter and that it will revert shortly. I will advise the Deputy of the outcome of the Financial Regulator's consideration of this matter.