Banks may face restrictions on fixed-rate mortgages, MEP warns

Irish MEP Brian Hayes has warned that banks may be restricted in how they offer fixed-rate mortgages in the future due to concerns among international regulators about the risks posed by these loans.

Mr Hayes said the Basel Committee, the primary global standard-setter for the prudential regulation of banks, is conducting an examination of “interest-rate risk in the banking book” with a view to proposing regulatory changes as to how they are offered and structured from 2018.

“International regulators want banks to be better protected from interest rate risk,” he said. “It is considered that fixed-rate mortgages carry a risk in that the rate cannot be adjusted to reflect market conditions.

“The Basel Committee generally advocates for variable rate mortgages since banks can adjust them according to market conditions and can link them to central bank interest rates.

“The Basel Committee believes that risks should be transferred from lender to borrower as much as possible. I do accept there are systemic risk issues that need to be tackled. But to restrict all banking practices to render them useless should not be the way to proceed.”

Most popular mortgages

Variable-rate mortgages are the most popular form of home loan in Ireland, accounting for two-thirds of all new mortgage agreements in Ireland in the year to September 2016, both for owner-occupied properties and buy-to-let, according to Central Bank data.

This is above the euro-area average. However, a number of Irish lenders, notably Bank of Ireland, have put a greater emphasis on fixed-rate loan rates in recent years, arguing that it minimises risk.

“Unfortunately, we don’t have a well-developed market for fixed-rate mortgages in Ireland,” Mr Hayes said. “In the US and mainland Europe the situation is very different. It’s possible to get fixed-rate mortgage products of 20 years in the US and in other European countries for 3 per cent or less.”

Mr Hayes noted how in Belgium a 20-year, fixed-interest mortgage was available from KBC bank for 3.15 per cent, while here Bank of Ireland is the only institution to offer a 10-year fixed-rate product, with a rate of 4.4 per cent.

“The work undertaken by the Basel Committee will not help the development of a better fixed-rate market for mortgages in Ireland,” he said.

“But I believe lawmakers and policymakers should keep pushing for a better deal for customers when it comes to fixed-rate products.

“There is serious concern in Belgium and France over the Basel Committee’s examination. That is because the fixed-rate regime in those countries has worked so well for people for decades.

The process is contingent on new rules being developed for banks under a so-called Basel IV process. “This would update the current rules on how much capital banks have to hold to protect against systemic risk,” Mr Hayes said.