Ciarán Lynch (Cork South Central, Labour)
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Question 721: To ask the Minister for the Environment, Heritage and Local Government if his attention has been drawn to the fact that the Housing Finance Agency is applying interest rates of the order of 11% to local authority loans despite the reductions in European Central Bank interest rates; and if he will make a statement on the matter. [28833/09]

Michael Finneran (Roscommon-South Leitrim, Fianna Fail)
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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 loan draw down. 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 (the Agency) prevailing at the time these loans were advanced. Rates were fixed for the life of the loan (generally 25 – 30 years). The introduction of variable interest rates for local authority mortgages provided borrowers with increased flexibility and choice.

Borrowers with these long term fixed rate local authority mortgages, which are no longer available, are permitted to redeem such loans without any interest rate penalty and refinance them 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 – has had to bear the losses on such loans.

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, particularly given the cost already being borne by the State where the holders of such loans availed of the option to refinance in the private sector without penalty.