Every day, up and down the country, borrowers reschedule their mortgages. This happened before the pandemic. It’s happening during the pandemic. And it will happen again long after the pandemic has faded into history. The term of , say, 25 years set at the start of a mortgage is not set in stone.
Many borrowers, whose financial circumstances allow, later increase their repayments and so shorten the term of the loan and save themselves interest. Others suffer a financial set back and negotiate an extension of the original term to reduce their monthly repayments. Still others are granted payment breaks or periods of interest-only.
Many of these resume full repayments when their financial circumstances improve and they pay off the loan according to the originally agreed schedule.
This also applies to the customers of other lenders such as credit unions. Borrowers get into difficulty, they engage with their credit union and the term is extended to reduce the amount of the monthly repayment. It takes longer to pay off the loan, so they pay more interest. Borrowers understand this and appreciate the flexibility.
So it makes no sense for Government Ministers and opposition politicians to be berating lenders for charging interest to the 72,000 mortgage holders to whom banks have given a payment break. Accusing the banks of profiteering or of charging penalty interest is patently ridiculous. This is an everyday, normal lending practice in Ireland and all around the world. It should not be demonised. There are many reasons to criticise the banks but this is not one of those reasons.
No one suggests that the supermarkets should stop charging customers for their shopping during the pandemic. No one suggests that cafés should not charge their customers during the pandemic. No one suggests that The Irish Times should be free during the pandemic.
And no one is suggesting that the Government should seek a waiver of interest on the national debt during Covid. If the Government suggested this, they would be laughed at by their lenders.
We would be right to criticise the banks if they were to charge customers penalty interest on their rescheduled payments. But they don’t charge penalty interest. They charge normal interest on the mortgage balance. The Consumer Protection Code and Code of Conduct on Mortgage Arrears prohibits lenders from charging penalty interest on arrears of home loans.
Irish lenders responded quickly to the pandemic by making it very easy for customers to apply for payment breaks. They were granted over the phone based on the word of the borrowers. There was a minimum of hassle. They did not ask the borrower for paperwork to prove that they had suffered a financial setback. It was an emergency response to an emergency situation and 72,000 account holders quickly availed of the payment holiday.
It would be a serious mistake to pressurise the banks to waive interest on rescheduled loans. Up to now, the lenders have rescheduled mortgages very easily and with a minimum of hassle. If we force the banks to waive interest, we may be helping a few account holders now who have already availed of a payment break, but future borrowers will suffer as they will find it difficult or even impossible to get such a break in the future.
Some 60 per cent of borrowers who availed of the three-month Covid-19 mortgage payment break have applied for this to be extended to six months. The banks would be right to refuse these extensions if the Government insists that the lenders waive interest during this period.
And what about the 90 per cent of borrowers who did not avail of a payment break? They continued to pay their mortgage in full. They did not take a break because they wanted to pay off their mortgage according to the original term. It would be completely unfair to waive interest for some customers while charging the full interest to those who did not take a payment break.
The banks have handled this very badly. The first announcements were confusing and did indeed give the impression that they were not charging interest. Had they made this clear from the very start, the issue would not have arisen.
Then the lenders claimed that the European Banking Authority rules required them to charge interest or else treat the mortgage as non-performing. There was no need for this justification. They should have said that they were charging interest because it was the right thing to do, irrespective of the EBA rules. Now opposition politicians can make hay out of what the banks said to the Government and whether they misled them or not.
Sometimes I wonder if the banks do these things deliberately. They divert the Government and opposition down a non-issue rabbit hole. This takes the focus away from where it should be – the many real issues for which we should be criticising the lenders. And the biggest issue of all is the very high mortgage rates in Ireland.
Irish mortgage holders, who don’t have trackers, are paying twice the average interest rate charged on home loans in other euro zone countries. A typical Irish borrower is paying about €300 more per month than they would be paying in the rest of the euro zone.
The Government should be putting relentless pressure on the banks to bring down mortgage rates. The Government should bring in legislation to ban cash back and other tricks that confuse the customer and result in them paying higher rates. It should bring in legislation to deal effectively with the small number of irresponsible borrowers in long-term arrears who push up the interest rate for the vast majority of responsible borrowers.
If the Government did these things, they would be providing a long-term substantial benefit to 300,000 mortgage holders, rather than a short-term benefit to a small group of borrowers.
Brendan Burgess is the founder of Askaboutmoney. com