The Minister for Finance, Michael Noonan has to reconcile a conflict of interest between his obligation to protect the value of the State's shareholding in the major banks, and his concern to see the banks and building societies reduce their standard variable mortgage rate (SVR) for customers. This is not a new dilemma for the Minister but Mr Noonan's past efforts at moral persuasion have had limited success.
He is set to try once again shortly when he meets with mortgage lenders to discuss further variable loan rate reductions. Recent Central Bank research showed Irish SVRs as being the highest in Europe. Mr Noonan's intervention comes within weeks of the budget, and within months of a general election. Certainly, his political timing cannot be faulted.
The gap has narrowed to some extent between the loan rates charged to mortgage borrowers, and the prevailing European Central Bank (ECB) interest rate. The latter rate remains close to zero, where it has been for many months. But the Minister has to tread a careful line in pressing the banks for lower rates, which reduce their profitability, and make them less attractive to investors. Today, the State still owns no less than 99.8 per cent of AIB, 75 per cent of the PTSB, and 14 per cent of Bank of Ireland. The Government intends in time to sell off its shareholdings, and hopes to recover the €30 billion cost of rescuing these surviving banks.
Historically, interest rates world-wide have never been lower for longer, but this is about to change. Rates in the US and the UK are set to rise within months, although the ECB is likely – given weak euro-zone growth – to leave rates unaltered for some time yet. However, low interest rates make mortgage finance seem more affordable for now. But over the lifetime of a loan, of 30 years duration, and – as interest rates rise – then for some, mortgage repayments could prove more challenging. After the property crash, and the high rate of default by mortgage holders, past mistakes need to be fully appreciated, and lessons learned to avoid their repetition.