Families need urgent action on the issue, writes Michael McGrath
THIS week, I secured a Dáil debate on a real issue of concern to thousands of families.
Permanent TSB, a state-owned bank, is charging its residential mortgage customers a standard variable rate 2.15 points higher than AIB, which is also state-owned.
For someone with a mortgage of €250,000 over 25 years, it is adding more than €300 to their monthly payment. Over the lifetime of the mortgage, the Permanent TSB customer would be paying €90,000 more than the AIB customer. Upwards of 80,000 mortgage holders are affected by this problem.
In addition, as Permanent TSB customers come off fixed rates, they too face being hit with higher rates.
The situation for customers of EBS is also worth noting as it is a fully owned subsidiary of AIB, yet charges a rate over 1% in excess of its parent bank.
Why is this allowed to be the case? I accept there is never going to be a situation where all banks charge the same interest rate, nor would that be desirable in a competitive market. However, I contend that the premium being paid by customers of Permanent TSB is profoundly unfair and must change.
Typically, banks charging higher rates will point to their cost of funds as justification. The Central Bank looked at this recently and concluded that funding costs could not explain the difference in rates.
Permanent TSB has highlighted the existence of loss-making tracker mortgages on its books as a continuing drain on its profitability. This is a problem that is rightly being addressed with the troika as part of attempts to reduce the cost of restructuring the banks.
However, it is unacceptable that one essentially captive group of customers should be targeted to make up for losses elsewhere in the bank.
In a normal functioning market, customers would have the choice to go to a different mortgage provider and avail of a lower rate. Unfortunately, the market for mortgage switching is effectively frozen.
It is important to highlight that what Permanent TSB are doing may well be self-defeating, as high rates are driving more and more people into mortgage arrears. This will ultimately increase their need for recapitalisation, a process that is ongoing at its parent institution, Irish Life and Permanent.
At the end of 2011, the number of Permanent TSB mortgage loan accounts in arrears greater than 90 days stood at 11.5% of total cases compared with total industry arrears of 9.2%. How many of these mortgages would not be in trouble if Permanent TSB charged the same variable rate as AIB?
In January, I asked Finance Minister Michael Noonan if he had taken action to assist mortgage holders facing higher rates. He replied that “lending institutions in Ireland, including those in which the State has a significant shareholding, are independent commercial entities”.
This contradicts the stance the Government took in November, when AIB was publicly forced to pass on an ECB rate reduction to its customers. Brian Hayes, the junior finance minister, acknowledged the seriousness of the situation when he accepted that “…the implications of what was happening when the banks were increasing mortgage rates wasn’t recognised. Clearly, an eye was taken off the ball.”
Why is the Government applying one rule in the case of AIB and another for Permanent TSB?
Since moving the motion in the Dáil, I have been inundated with emails and phonecalls from people affected by the exorbitant interest rate charged by Permanent TSB. They know they are being treated unfairly and they have had enough.
The time for action is now. The Government needs to seize the initiative and hold the senior management of Permanent TSB to account on this issue. Pressure must be brought to bear to bring about a reduction in the variable rate charged by the bank. This makes both social and economic sense. Immediate action in this regard will undoubtedly save many more families from joining the already massive list of people in mortgage arrears.
I will continue to press this until the blatant anomaly is addressed.
* Michael McGrath is Fianna Fáil spokesman on finance
© Irish Examiner Ltd. All rights reserved