Irish mortgage rates: mind the gap with rest of euro area

Large differential between low interest rate banks pay depositors and high interest rate they charge variable rate borrowers requires detailed scrutiny

Does the Irish variable rate mortgage market now offer good value to consumers when compared with other euro zone countries? Certainly not. And that is why MEP Brian Hayes has called on the newly established Competition and Consumer Protection Commission (CCPC) to investigate why the cost of variable home loans is so much higher in Ireland than in other euro area countries. Here the average standard variable mortgage rate is 4.26 per cent, the euro zone average rate is 2.47 per cent, while the official interest rate set by the European Central Bank (ECB) now stands of 0.5 per cent - its lowest ever.

In the rest of the euro area mortgage holders with variable loans, it would seem, fare a great deal better. Most such borrowers receive the full benefit of lower interest rates set by the ECB. But in Ireland, the wide and widening spread between what banks pay for deposits – a derisory sum – and the interest rate that they charge for home loans – an excessive amount – is worrying. It suggests that the banks here may be profiting greatly at the expense of their customers, the variable rate mortgage holders. Such a very large differential between the low interest rate banks pay depositors and the high interest rate that they charge variable rate borrowers requires the kind of detailed scrutiny that the CCPC is best equipped to provide.

The country’s largest banks justify the high rates on home loans on a number of grounds. They cite a higher cost of funding: the huge number of loss-making tracker mortgages – where the interest rate is set by the ECB – that they carry on their books, and the need to meet the demanding capital standards set by the Central Bank. For homebuyers, however, the high cost of borrowing for homebuyers, where loans have been priced to minimise risk and maximise profit for the banks, makes it ever harder for first time purchasers to finance home ownership.

Mr Hayes, in calling for a mortgage rate inquiry, has rightly raised an issue that the CCPC should fully investigate.