Pressure mounts on lenders for variable mortgage rate cuts

The Government is set to increase pressure on the main banks to reduce their standard variable mortgage rates.

The Central Bank has said in a report to the Minister for Finance that it would be advisable for the banks to cut rates to avoid a response from the political system.

Attention will switch to the mortgage rates issue after the Government on Wednesday published its report on mortgage arrears. This will put in place a new oversight system in which the courts will be able to overturn bank vetoes on personal insolvency arrangements in certain circumstances.

Sources said a study by the Insolvency Service of Ireland of several dozen cases, in which banks had vetoed such deals, showed that under the new legislation the courts would be expected to allow the majority of these arrangements to go ahead.

Close attention is being paid to ensure the new rules are safe from any challenge from creditors on constitutional grounds. The new rules, to be added to a personal insolvency Bill before the Oireachtas, are expected to say that the courts can only overrule a bank veto in certain circumstances and that doing so would not leave creditors worse off than in the case of a bankruptcy.

The legislation will also have to make clear that no group of creditors is dealt with unfairly, said sources.

Details of the new legislation have yet to be finalised and are expected at Cabinet in the coming weeks.

Political pressure

With the new plan being put in place on mortgage arrears, the Government now faces political pressure on standard variable mortgage rates, with Minister for Finance Michael Noonan due to meet bank chief executives next week.

In a report to Mr Noonan, the Central Bank is understood to say it would be advisable for the banks to cut standard variable mortgage rates to head off any political response on the issue. Mr Noonan has refused to rule out increasing the bank levy if banks do not reduce interest rates.

The Central Bank report to Mr Noonan is believed to say that, overall, the banks are not making excessive profits on lending when account is taken of their low-yielding tracker mortgages. But it said if there was more competition in the market, the banks would nonetheless have to cut their standard variable mortgage rates.

On the arrears plan, Mr Noonan said removing the bank veto and encouraging more people to avail of the personal insolvency rules were the main initiatives .

The Mortgage-to-Rent scheme has been expanded, making it possible for more homeowners in the greater Dublin area to enter the scheme.The initiative allows mortgage holders to surrender their homes to a not-for-profit housing association, which then rents it to the original owners.

Previously, the property must have had a current market value of less than €220,000 in the greater Dublin area and €180,000 in the rest of the country.

The greater Dublin area cap has been lifted to rise to nearer €350,000, and changes for homes outside the capital will be announced in future.