Banks charging interest on payment holiday loans undermined by EU guidance

Irish banks’ insistence that they must charge interest on 80,000 mortgage loans during payment holidays has been undermined by new guidance from European regulators.

A decision not to apply interest for six months to loans parked during the Covid-19 economic lockdown could cost banks up to €150 million, analysts at Goodbody Stockbrokers estimate.

But the banks’ current practice of applying interest and adding it to the principal of a loan at the end of the break period would add €4,300 to a €300,000 mortgage with 30 years to go, according to price comparison website Bonkers.ie.

The European Banking Authority (EBA) on Tuesday published a report on payment breaks throughout the EU which clarified that loans would not have to be reclassified as being in trouble if a bank stopped applying interest during the period of relief.

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When banks agreed in mid-March to offer payment holidays on loans they were relying on EU banking rules which stated that non-accrual of interest is taken as a sign a borrower is unlikely to repay a loan – resulting in it being classified as being in default.

Irish banks sought from the outset of the Covid-19 crisis to ensure payment breaks would not affect either a borrower’s credit rating or lenders’ own bad loan levels.

The EBA said on Tuesday that banks could forgo interest from borrowers during Covid-19 payment breaks if it amounted to not more than 1 per cent of what a borrower is due to pay over the lifetime of a loan.

It comes three months after the same European regulator issued guidance that had been the subject of differing views between lenders and the Central Bank.

Irish banks concluded that initial EBA guidance supported their approach. However, the Central Bank has said that “both interest accruing and interest not accruing are permissible under the guidelines”.

While banking sources said that the new EBA document had undermined their interpretation of the EBA's original guidance, Davy analyst Diarmaid Sheridan said there was still a "reasonable chance" that the cost could be over 1 per cent, which would lead to no change in the current stance of banks.

“The industry is studying the detailed guidance published by the EBA,” said a spokeswoman for Banking and Payments Federation Ireland.

Credit ratings

Sinn Féin TD Pearse Doherty this week accused banks of "wilfully misleading" Ministers after it emerged that bankers told then taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe in a meeting on May 11th that if interest did not continue to accrue loans would be considered to be in default, impacting on customers' credit ratings.

The EBA guidelines at the time allowed for payment breaks that “only change the schedule of payments, namely by suspending, postponing or reducing the payments of principal amounts, interest or of full instalments, for a predefined limited period of time”. It added that “no other terms and conditions of the loans, such as the interest rate, should be changed”.