Regulation keeping mortgage rates high for Irish homeowners is defended by the Central Bank

Banks blame Central Bank of Ireland rules for requiring them to set aside more capital when lending a mortgage than their counterparts in the rest of the eurozone.

This is seen as a legacy of the financial crash more than a decade ago.

In a submission to the Treasury’s Retail Banking Review, the central bank acknowledges that the question has been raised as to why homebuyers in Ireland generally pay higher interest rates on their mortgages than elsewhere in the European Union.

The bill said: “People are asking if these higher interest rates are warranted and if regulation is to blame – and if so, it should be.”
be changed.”

The central bank said it was “paying close attention to whether the regulatory capital requirements that apply to mortgage lending might be too strict.”

According to the Central Bank of Ireland, the average interest rate on a new mortgage in this country was 2.73 percent in May.

This is the second highest in the euro zone after Greece, where the average is 1.76 percent.

The regulator’s filing said its regulatory capital rules increased mortgage rates in that country by 0.3 percentage points to 0.5 percentage points.

Only a small part of this is due to regulation, as banks set aside capital to reflect the fact that some borrowers may not be able to pay off their mortgages even if they are not forced to by regulators.

The central bank said in its submission that the amount of principal that had to be set aside when originating a mortgage reflected the likelihood that a borrower would default on repaying their mortgage loan.

It also reflects the amount that the bank is likely to lose if the borrower stops paying.

Improved economic conditions and other improvements mean the probability of default has fallen, which is “positive for the cost of borrowing”.

What a bank might lose when a borrower defaults was a major concern during the financial crash, and its impact continued to be an issue, the central bank said.

“In general, therefore, the overall level of capital requirements for mortgage loans in Ireland is reasonable,” reads the bill.

There may be a small amount of room to set aside less capital against the European discount rate, but this is likely to be relatively small, the regulator said.

Last month, the European Central Bank raised interest rates by 0.50 percent.

This is to cost those on trackers.

Pressure is now mounting on lenders to resist increasing variable interest rates for the 200,000 homeowners, which is variable in this country
so tall.

Variable interest rates are among the most expensive in this country, with some fees running as high as 4.5 percent.

The Bank of Ireland said it is keeping an eye on fixed and variable rate offerings.

AIB said it will monitor all of its fares.

Permanent TSB said it could absorb the initial hike in ECB rates without passing the cost on to variable-rate borrowers, putting pressure on other lenders.

The 0.50 percentage point rate hike means a family with a typical tracker could face an additional €57 per month in repayments.

This equates to €685 per year in higher repayments.

This is based on a tracker of €250,000 with 25 years remaining and a margin of 1 percent over the ECB rate.

Further rate hikes by the ECB are expected next month.