New bank levy could see mortgage rates rise, not fall

Government move to force drop in line with ECB cuts could backfire, warns broker

Plans under consideration by Government to financially penalise banks which do not lower the variable interest rates offered to mortgage customers are unnecessary and could actually see banks freeze rates or increase them, a leading mortgage expert has warned.

The State's main banks have been under intense political and public pressure in recent weeks to cut rates which, at 4.2 per cent, are far above the euro zone average of 2.47 per cent. However, the banks have stood firm in their reluctance to pass on European Central Bank (ECB) rate cuts to variable customers.

Most lenders only returned to profitability last year, following the 2008 crash, and this is the reason they have put forward for their inability to pass on a sustained sequence of ECB rate cuts to more than 300,000 variable rate mortgage holders.

Increasing yields

The Government, which appears to have run out of patience with the sector, is considering increasing the banking levy that yields €150 million a year from the State’s lenders unless they move to cut variable rates, Tánaiste Joan Burton suggested.


The three-year levy was introduced last year with the Government saying the rate reflected the significant role played by the banking sector in Ireland’s economic crisis.

While Minister for Health Leo Varadkar told RTÉ's The Week in Politics that the Government was "not going to interfere in the commercial decisions of banks", Ms Burton said measures to penalise lenders, including hiking the levy were "a possibility".

However, mortgage broker and commentator Karl Deeter warned such a move could actually see banks hold their rates at high levels for longer to protect themselves against potential financial penalties coming down the tracks.

“All the banks are planning to drop their rates, but if the Government says it is planning to tax them further, then they will most likely keep them where they are,” he said.

“Competition drives down rates and they are falling here.”

He pointed out that some variable rates which were above 5 per cent two years ago are now closer to 4 per cent, with some banks offering rates of about 3.5 per cent.

"If our variable rates are so high, why don't we see other banks from across Europe rushing into the market?

“The reality is that interest on variable rates is expensive when compared to tracker mortgages but the comparisons are not real: the tracker is the dodo of the market. They don’t exist any more.”

Mr Deeter said all the indications were pointing towards a sustained period of lower rates. The long-term projections from the ECB suggest borrowing costs would remain low while the number of homeowners in arrears was also falling.

“People are saying we need to do something, we have to see rates drop, but they will drop anyway. Measures such as this will allow politicians to claim a victory while banks will be able to say they have listened to their customers. I don’t think either will have been the case.”

Conor Pope

Conor Pope

Conor Pope is Consumer Affairs Correspondent, Pricewatch Editor and cohost of the In the News podcast