Finance Minister Michael Noonan has given banks until July 1 to cut interest rates for hundreds of thousands of mortgage holders, or face penalties.
The six main lenders have agreed to the reductions after bank bosses were confronted with a stark Central Bank report which said higher than necessary rates for mortgage owners were dragging down the economy.
Government sources said last night that rate cuts of up to 0.75% could be expected over the coming year.
After meeting the banks this week, Mr Noonan said if they did not act that he would: “I’ve given them space until the 1st of July to come up with the new announcements, and a range of products and the price of the different products.
“I’ll be hoping for downward movement and after the consultation with the six, I would think that all of them in one way or another will offer an option to each holder of their mortgages to get a reduced rate.”
Under the agreement, banks will offer mortgage owners lower variable rates or the option of moving over to better fixed rates.
“From the discussions I had, I’m assured that each bank will offer each mortgage holder a rate which is lower than the rate which they have at present,” the minister said.
The average Irish variable rate is 4.26% at present, 2% higher than the eurozone average. It is also 3% higher than tracker rates here.
The six banks – AIB, Bank of Ireland, Ulster Bank, Permanent TSB, ACC and KBC – now face the threat of rates being regulated by the Central Bank or new levies being applied in the next budget if they fail to cooperate.
Mr Noonan said: “As long as they move we won’t have to take further action.”
His comments came as a Central Bank report on mortgages concluded that “higher than necessary lending rates do tend to act as a drag on the economic recovery”.
But it also concluded that interference with lenders could “damage” the long-term prospects of the banks.
It shows that €41bn — or four in 10 — mortgages in Ireland are on variable rates.
But it also concluded that demand, including “political pressure”, should not lead to “excessive risk taking”.
An estimated 300,000 borrowers have variable rate mortgages.
Mr Noonan said he had informed banks that a Bill before the Seanad also proposed giving greater powers to the Central Bank to regulate mortgage rates.
“I also pointed out to them that the Government doesn’t have a majority in the Senate, so that there’s pressure coming on the political side and that I expected them to make movement.”
While Mr Noonan would not specify what lenders should cut rates by for “competition” reasons, informed sources said staged reductions of up to 0.75% were expected over the coming year.
A second round of meetings with the banks is expected after the July 1 deadline for the first cuts, which would give the Coalition an opportunity to push for further reductions ahead of October’s budget.
But Fianna Fáil dismissed any potential risks associated with interfering with rates. Finance spokesman Michael McGrath called for action, not words:
“It is my belief that we are already living with the negative impact both socially and economically of excessive variable mortgage rates which are in fact twice the European average. We cannot rely on moral pressure alone to solve this issue.
“A reduction of 0.25% and the vague promise of a further cut of 0.25% will simply not be acceptable. That is why I believe there is a need for an intensified campaign in the Dáil and from advocacy groups to keep this issue firmly in the spotlight.”
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