Moves to force mortgage rate cuts would hurt banks - Fitch

The introduction of legislation that would force Irish banks to reduce Standard Variable Rates (SVR) on residential mortgages could be highly damaging for financial institutions, ratings agency Fitch has warned.

The agency said any move to make lenders cut rates would make it difficult for them to sustain profitability and build up capital through retained earnings.

Political pressure has been mounting on banks here to cut rates after research published by the Central Bank identified Irish SVRs as the highest in Europe

Minister for Finance Michael Noonan recently set a July 1st deadline for lenders to offer cheaper mortgages to customers or risk sanctions. Taoiseach Enda Kenny also indicated that action may be taken against banks in the next budget if rates are not reduced.

Despite the threat of sanctions, most of the country’s lenders have made only minor tweaks to rates, with the majority offering to move customers to fixed-rate options instead.

Currently, there are more than 300,000 variable rate mortgage customers in the Republic, paying an average of 2 per cent more than the average European customer. However, banks are reluctant to reduce rates as they are effectively subsidising tracker mortgage holders.

Fitch said that risks associated with mortgage lending in Ireland are still high and said this provides some explanation for charging higher margins.

“Within the EU, only Greece reports higher mortgage arrears and default rates. At end-2014, nearly 15 per cent of all mortgage loans in Ireland were in 90 days arrears or more, compared to an EU average of 2.8 per cent. Years of restructuring means that Irish banks are beginning to reduce impaired loan volumes but the problem remains considerable and it will take a number of years of sustained improvement before the stock of loan impairments is adequately cleared,” the agency said.

Earlier this year, the Central Bank said it had no powers to control mortgage interest rates and did not intend to seek any as it would curtail competition in the market.