Written answers

Thursday, 16 July 2020

Department of Finance

Mortgage Interest Rates

Photo of James LawlessJames Lawless (Kildare North, Fianna Fail)
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27. To ask the Minister for Finance his views on whether claims by banks here that they must charge interest on 80,000 mortgage loans during payment holidays has been undermined by new guidance from European regulators; and if he will make a statement on the matter. [16315/20]

Photo of Gerald NashGerald Nash (Louth, Labour)
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34. To ask the Minister for Finance the action he plans to take to address the accrual of interest on mortgage payment breaks; his views on the Central Bank and European Banking Authority advice relating to the charging of interest on mortgage payment breaks; if he plans to pass legislation to prevent the charging of interest during mortgage payment breaks in line with other EU countries; and if he will make a statement on the matter. [16289/20]

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I propose to take Questions Nos. 27 and 34 together.

The Members of the Banking and Payments Federation of Ireland introduced the payment break for their customers on 18 March last. These payment breaks were agreed quickly to provide substantial and rapid relief to worried and anxious borrowers, including mortgage holders, in situations where income has been directly impacted by COVID-19, and during a fast moving and evolving public health crisis. At the end of June, almost 160,000 payment breaks have been approved for Irish borrowers, representing €20.1 billion of loans.

Given pre-existing EBA guidelines on the classification of default, the BPFI and its members sought to ensure that its payment break would not lead to the classification of loans as being non-performing.

Two weeks later, on 2 April, the EBA published Guidelines. These guidelines set out the criteria that payment moratoria must meet in order to benefit from supervisory flexibility and for them to not automatically lead to the loans being classified as forborne.

The key paragraph in relation to the charging of interest, paragraph 24, was interpreted in different ways across Europe. It states that:

"The moratorium changes only the schedule of payments. This condition is consistent with the objective of the moratorium to address the systemic short-term liquidity shortages. In order to achieve this objective, the moratoria suspend, postpone or reduce the payments (principal, interest or both) within a limited period of time. This clearly affects the whole schedule of payment and may lead to increased payments after the period of the moratorium or an extended duration of the loan. However, the moratorium should not affect other conditions of the loan, in particular the interest rate, unless such change only serves for compensation to avoid losses which an institution otherwise would have due to the delayed payment schedule under the moratorium, which would allow the impact on the net present value to be neutralised."

Banks across Europe interpreted the above paragraph in different ways with the results that different schemes were introduced. Some countries provided for the accrual and capitalisation of the interest. Others provided for the non-accrual and a number provided for accrual of the interest but not its capitalisation.

In its letter to Deputy Doherty on 22 June last, the Central Bank stated that the EBA was expected to provide further clarity on the specific issue of interest accrual and, I assume in light of the discussions then underway with the EBA, the Central Bank outlined that both the charging and non-charging of interest is acceptable under the guidelines.

The European Banking Authority duly provided clarifications in its implementation report on the 7th of July. It confirmed in relation to the net present value or NPV of a loan that:

" There may be a decline in the NPV if .... no interest is charged for the time covered by the moratorium. Alternatively, the moratorium may be NPV-neutral (i.e. no change in the NPV) if subsequently at least one of the instalments is adjusted upwards or added."

The EBA also confirmed that its guidelines on the classification of default did not apply to loans on a payment break under a general moratorium. The BPFI payment moratorium complies fully with the EBA's Guidelines because it is NPV-neutral.

Finally, the Government and the Central Bank of Ireland have stated that it is essential that lenders fully explain the implications, including any associated cost or other significant impacts, of the particular payment break measures being put in place. For instance, lenders should outline if the repayment term of the mortgage will be extended due to the payment break, if monthly payments will increase following the resumption of the mortgage repayments, if interest will continue to accrue during the payment break and the implications this will have for the total cost of the credit, and any other significant matter for the customer when availing of a Covid-19 payment break, or indeed for any other reason.

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