Higher mortgage rates a ‘drag’ on economy, report finds

Higher than necessary mortgage rates for borrowers act as a “drag” on the economy but any interference with lenders risks damaging the long-term prospects of banks, an analysis by the Central Bank has concluded.

The report looked at the difference between the official ECB rate and what banks charge here for variable mortgages as well as the risks involved in regulating those charges.

The report, which discusses the cost of credit risk associated with lending and the cost of running a bank, concludes that lending rates depend on the cost of funds.

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The analysis shows that, when renegotiated loans are stripped out, the new mortgage interest rates in Ireland at the end of last year were 4.26% compared to a median rate of 2.53% in other European countries.

Finance Minister Michael Noonan said the report proved that lenders were charging more than needed.

The report states: “The spread between official ECB rates and the standard variable rate is relatively high and lending rates are above average compared to European peers.”

It notes the lack of competition in the lending sector here and claims the recovery has only just begun and that banks are still fragile.

It notes that, while there are “political pressures”, there should not be “risk taking” especially given the history of the sector here.

Furthermore, while higher rates affect borrowers, any interference could damage the economy.

It said while higher than necessary lending rates act as a drag on economic recovery, policy steps which interfere with rates create “damaging side-effects” and would also damage banks’ long-term prospects.

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