James Reilly (Dublin North, Fine Gael)
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Question 130: To ask the Minister for Finance if, in his dealings with the banks and building societies, he will insist as part of these negotiations that the banks offer flexible affordable terms to fixed rate mortgage holders without excessive penalties in view of the fact that these homeowners are trapped in expensive mortgages at high rates; if he will request the banks to show generosity and flexibility to fixed rate mortgage homeowners; the number of homeowners on fixed rate mortgages; and if he will make a statement on the matter. [20987/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am assuming that the Deputy is referring to my dealings with those financial institutions covered by the Bank Guarantee Scheme.

I am advised that the number of owner-occupier homeowners on fixed rate mortgages is in the region of 96,000, based on information recently provided by the covered institutions.

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 can accordingly budget more confidently. In doing so they avoid the risk of rate increases, but of course they forgo the chance to benefit from rate reductions. 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.

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 in relation to future trends in interest rates for the period and the fact that longer term deposits generally attract higher interest rates than short term. In addition, where a customer 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. If lenders were prohibited from passing the entire costs to borrowers switching to variable rates, this could increase the price and reduce the availability of fixed rate mortgages. However, if a mortgage provider were charging fees other than the recouping of costs, then the Financial Regulator would require notification of same and could require the lender to amend such charges.

On 26 March 2009, I undertook, in this House, to raise concerns regarding the level of redemption fees with the Consumer Director of the Financial Regulator who has a statutory mandate to safeguard the interests of consumers. At the beginning of April my Department wrote to the Consumer Director to request confirmation that redemption fees charged for switching from a fixed rate mortgage cover funding costs only and that there are no other costs included.

To date, the Financial Regulator has been able to confirm to my Department, that all mortgage lenders have responded and that all have provided the formula used by that lender when calculating the early redemption fee applying to fixed rate mortgages.

The Financial Regulator is awaiting independent verification, by an actuary, from a number of lenders that the fee being charged recoups only those costs incurred by the lender when financing the fixed rate mortgage. However, the verifications received indicate that the formulae applied by lenders seek to recoup the loss to the lender arising from the early redemption of the fixed rate mortgage and do not seek to apply a penalty charge on the borrower.

The Financial Regulator is also examining whether any other costs are being charged such as administrative fees, etc. Any such charges may be subject to approval by the Regulator under section 149 of the Consumer Credit Act 1995 and will be examined further in that light. To date the responses indicate that most lenders do not levy additional charges in the case of early redemption of fixed rate mortgages.

The Financial Regulator has advised that further analysis may be necessary once all of the information is received and reviewed. Should the remaining analysis by the Financial Regulator indicate that further consideration of this issue is required, it will be carried out.