Dáil Éireann - Volume 682 - 13 May, 2009

Written Answers. - Financial Services Regulation.

Deputy Denis Naughten asked the Minister for Finance the steps which he is taking to address the cost of fixed rate mortgages; the discussions he has had with the Irish Financial Services Regulatory Authority on the issue; and if he will make a statement on the matter. [18811/09]

  Deputy Brian Lenihan: As the Deputy will be aware, fixed rate mortgages can be regarded as a form of insurance against interest rate changes as fixed rate mortgages provide certainty and security to borrowers regarding the level of their repayments.

As referred to in the Deputy’s question in circumstances where many households are faced with significantly increased financial pressures, the current environment of very low interest rates clearly highlights to fixed rate mortgage holders the saving that would be available if they benefited from a variable interest rate. It is clear, therefore, why many fixed rate mortgage holders seek to switch to secure lower repayments.

However, when a borrower signs a fixed-rate mortgage contract with a mortgage provider, the lender in turn enters into an agreement where they borrow the money at an agreed rate. The mortgage lender must repay the money at this agreed rate, so there is a cost to the institution if the fixed rate agreement is terminated before the agreed term which gives rise to the redemption fee charged in these cases.

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 [581] 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.