Is mortgage interest relief really on the way back for Irish borrowers?

The Coalition is under pressure to act on a number of fronts to support mortgage borrowers as interest rates rise – there are demands from the Opposition for a cap on interest rates, for a reintroduction of mortgage interest relief and for action to help people whose loans were sold to investment funds. But is any move likely? Ministers have resisted so far, but have been careful not to rule out policy measures. With more interest rate rises coming, this is going to become a big issue. So where are the key areas where debate is growing?

1. The plight of borrowers whose loans were sold to so-called vulture funds

More than 100,000 borrowers had their loans sold to funds, with some now paying interest rates of up to 7 per cent, well above the levels paid by those with the banking lenders.

Irish banks have been under relentless pressure from EU banking regulators in recent years to reduce the proportion of non-performing loans on their books. A key part of this was selling more troubled parts of their loan books to investment funds. Permanent TSB came under particular pressure to sell on such loans.

These loans are managed in the Republic by companies such as Pepper who are regulated by the Central Bank – in some cases the companies managing the funds are the owners, in others they are managed here on behalf of overseas funds. The message at the time to mortgage borrowers whose loans were sold was that they enjoyed the same protection under codes imposed by the Central Bank as other borrowers – for example, the obligation for the lender to be flexible with a borrower in arrears and to seek a way forward.

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Former finance minister Paschal Donohoe told the Dáil on several occasions that borrowers should be reassured about the protections they had and asked the Central Bank to conduct a review of these. But the review – and the debate at the time – centred more on how funds would handle borrowers in arrears. No one foresaw the risks which would come from a period of rapidly rising interest rates.

Has the Central Bank let down Irish mortgage holders?

Listen | 41:27

Brendan Burgess joins the podcast to explain his critique of Central Bank policy on mortgage interest rates. It comes after Central Bank governor Gabriel Makhlouf told an Oireachtas committee that Irish banks should increase interest rates to reflect increases applied by the European Central Bank. Plus: Cliff Taylor and Eoin Burke-Kennedy look at the latest economic trends.

As interest rates have shot up, many borrowers with the funds have seen their rates – which were already high by market standards – rise to fully reflect ECB increases. Some rates have risen from around 4 to 4.5 per cent to 7 per cent or more. The main lenders, which benefit from access to massive deposit funds on which they pay little or no interest to savers, have held off on passing on the full ECB increases except in the case of tracker mortgage holders, where rates rise in lockstep with ECB moves. But the nonbank lenders, some reliant on the markets to fund new lending, have pushed up rates much more rapidly. As the loan books in question had significant proportions of troubled or previously troubled mortgages, many borrowers were already on the edge. And many of these cannot switch to fix their interest rate at another bank, due to their credit history.

2. Has anything been done to address the issue so far?

Contacts have been under way between the Department of Finance, the Central Bank and the companies managing the fund-owned loans on the Irish market to try to assess the scale of the problem. In a recent Oireachtas committee hearing, Central Bank officials estimated that around 38,000 of the 100,000 loans sold to funds were particularly exposed. These are people on higher non-tracker variable rates with lenders who cannot offer them options such as a switch to a fixed rate (some of the lenders who bought the funds can offer such options, as they are engaged in new lending in the market and have fixed rate products).

[ Mortgage rates still low by European standards but set to climb fast ]

[ AIB to increase mortgage rates after fifth ECB move ]

[ The Irish Times view on the latest ECB interest rate rise ]

Minister for Finance, Michael McGrath, has indicated that the Central Bank should ensure the existing rules are applied to help borrowers to avoid going back into arrears – and the bank has emphasised that it is active in trying to achieve this. However, its senior officials have conceded that a rise in arrears is likely. McGrath has also asked the Central Bank if it needs new powers to deal with the issue – but as it has made clear that it does not want to control interest rates, it is not clear what these would be. Consumer advocate Brendan Burgess has suggested that the funds be obliged to charge no more than the banks from which they brought the loans – of which Permanent TSB is one of the most significant.

Of course, wider measures to help mortgage holders would help this group too – but so far the Government is resisting going there. There is a real issue for the 38,000 identified as being most vulnerable – more information about the rates charged to this group and their options is needed. But this is a problem the Government may struggle to deal with.

3. Sinn Féin calls for the return of mortgage interest relief

A Dáil debate on Wednesday saw the Government opposing a Sinn Féin motion to bring back mortgage interest relief. Mortgage interest relief, which offers borrowers tax relief on the interest portion of their mortgage, ended in the Republic in 2020. Sinn Féin wants to return the relief in a limited way, applying it to the increased element of the repayment as interest rates rise – and offering it for a temporary period of a year. This would mean those on variable and tracker rates would benefit, while those on fixed rates would not. In opposing the motion, the Minister for Finance warned that the annual cost of mortgage interest relief of €1,500 a year for variable and tracker borrowers would be close to €700 million.

Sinn Féin argues that the pressures facing mortgage holders, in addition to other cost-of-living increases, mean the move is justified and points out that its proposal is more targeted than the previous, costly scheme.

As with all measures which help large numbers of people, a big question is how much help is going to those who really need it, and how much to those who can, in reality, manage. Those on tracker mortgages have almost all had their loans since before 2008 and are thus well into their term and will generally have a significant amount of their loan paid off. The rapid recovery in house prices will also have moved most out of negative equity. Some will still face difficulties, but many trackers are held by people now financially well-established.

More exposed would appear to those whose loans were sold, as discussed above – who would also benefit from mortgage relief – as well as recent home purchasers who bought on fixed rates but will see their initial term run out over the next year or two.

The Government is likely to hold out against the return of mortgage interest relief, fearing that if it returned it would not be temporary, but the Opposition knows that with further interest rate increases in the pipeline, this issue is not going to go away.

4. Controls on mortgage rates

The Labour Party’s finance spokesman, Jed Nash, put forward a Bill last year – the Central Bank (Variable Rate Mortgage) Bill – proposing that as well as outlawing the charging of different rates for new and existing borrowers, the Central Bank be able to cap interest rates in cases where it believes this is justified, using criteria such as reasonable profit expectations, the cost of funds to the lender and what other lenders are charging. This might, theoretically, allow the bank to intervene in cases such as the vulture funds’ current charges, which are above the market average. Whatever the funding position, these loans are also often highly profitable, having been bought at discounts to book value of at least 50 per cent in most cases and, sources believe, in some cases higher. However, the Central Bank has made it clear it does not want to control interest rates. And a similar Bill put forward in 2015 was also opposed by the ECB and by the government, with then finance minister Michael Noonan questioning its constitutionality.

The politics of this are interesting. The man who put forward that 2015 bill was none other than the current finance minister, Michael McGrath, then in opposition, who repeatedly clashed with Noonan on the issue. Nash has pointed out that his Bill is almost identical. McGrath may get some cover from recent market trends, which show that interest rates on new mortgages here, from being at the top of the EU league for some time, are now among the lowest. The average rate on a new loan of 2.69 per cent in December is one of the cheapest, with only Malta and France having lower figures. Irish banks have been relatively slow to pass on rate rises, but are starting to do so and the average rate on a new loan is now likely to be above 3 per cent and set to rise quickly. The real guide will be how Irish rates compare later this year.

5. Tricky politics

Interest rates are going up and are unlikely to fall back any time soon. Measures to help borrowers will either cost taxpayers or the banks. And they are not easily designed to target those who are really facing problems, beyond ensuring that lenders deal sympathetically with arrears and offer options in these cases. The return to strong profit of the big lenders, likely to be confirmed by annual results in early March, will add fuel to the debate. That month, the ECB will announce yet another rate rise. Many borrowers on a range of variable rates will soon start to see very hefty annual increases in repayments and those who bought new homes in the last few years and are on shorter term fixed rates also face a shock when that term ends. The era of cheap money for borrowers is over and the transition looks bumpy.