Protecting consumers in a high inflation environment

The current inflationary environment has high costs for the economy and society. The increase in the cost of living over the past year has resulted in an erosion of people’s living standards. High inflation can also lead to lower investment, harming future growth and economic potential.

Inflation in the euro area was 9.2 per cent in December 2022 (down from 10.1 per cent in November). While the outlook is for a decline to 6.3 per cent this year, it remains too high and far from our 2 per cent medium term target.  High inflation entails large costs for the economy and society.  Its impact is being felt across every household and every business in the euro area, although not uniformly; lower-income households are the most impacted as they spend more of their income on energy and food (PDF 0.96MB).  Bringing inflation back to target matters for the community, as well as for the economy.

Interest rates are the main tool to fight inflation, which is why ECB rates have been rising since last July.  Increases in the ECB rates are transmitted over time to households (and businesses) via the financial sector, which is why we have seen lenders and credit servicing firms increasing rates on their mortgages in recent months.

The impact of tighter monetary policy on mortgage interest rates facing borrowers has not been uniform. Borrowers on tracker products – whether with banks or non-banks – have seen their rate increase automatically in line with the ECB rate. By contrast, retail banks – who provide 84 per cent of all principal residence mortgages – have to date increased fixed rates for new or switching customers (though to a lesser extent than the increase in ECB interest rates) and have made no changes to their variable rates.  Non-bank lenders and servicing firms, which typically rely on market funding (rather than also on deposits) and are thus more exposed to rising rates, have raised both fixed rates for new or switching customers (where available) and variable rates. These differences in changes in mortgage rates are based on lenders’ own pricing decisions, reflecting a number of factors, including the funding models of different lenders.

The impact of these rate increases on borrowers will depend on a combination of the rate increase itself and the financial and personal circumstances of the individual borrower. All lenders are required to follow the rules set out in the Central Bank’s Consumer Protection Code and the Code of Conduct on Mortgage Arrears (in addition to a range of other provisions of Irish financial services law).

Over the last decade, we have worked to build resilience in the financial system and strengthen the consumer protection framework, especially for mortgage borrowers dealing with arrears.

A range of State measures introduced in recent years have succeeded in keeping many people in their homes, and to work through their debt issues over time.  We have emphasised on the need for sustainable solutions, suited to individual borrower circumstances.  At end-September 2022, some 4.3 per cent of all mortgages on private homes were in arrears over 90 days, the lowest proportion since March 2010.  (We have also seen long-term mortgage arrears fall below 25,000 accounts for the first time since we started collecting this data.) The resilience built-up over the last decade means that the financial system is better equipped to anticipate and deal with mortgage arrears.

Around 30 per cent of Irish households have a mortgage secured on their home (a total of approximately 716,284 loan accounts as at September 2022).  The table below indicates how this is split by different mortgage lenders and service providers.

Table 1: Mortgage types (private homes)

*: Source: Central Bank of Ireland Mortgage Arrears Statistics
**: Estimates based on Central Credit Register data
***: Fixed rate includes accounts on a mixed rate.

Approximately 39 per cent of all mortgages are currently on a fixed rate and most new lending – over 80 per cent by value – is on fixed rates.  This high share of fixed new lending has increased the resilience of households to interest rate increases. We will continue to monitor the level of resilience as borrowers roll-off their fixed rate mortgages in the coming years.

Over half of mortgage loans continue to be on variable and tracker interest rates. While those on tracker rates will have seen an increase matching the ECB rate increases, this is typically from a historically low base. The remaining loan accounts are on non-tracker variable rates. Of these, approximately 38,000 are held by non-banks who do not originate loans and so do not provide a full suite of lending products (such as a generally available fixed rate).

As I indicated above, our consumer protection framework applies irrespective of whether a loan is held by a bank or a non-bank. Our measures seek to ensure that lenders are transparent and fair in all their dealings with borrowers and that borrowers are protected from the beginning to the end of the mortgage life cycle (for example through the initial marketing/advertising stage and in assessing the affordability and suitability of the mortgage).

Lenders also have to explain to borrowers how their variable interest rates have been set (including in the event of a rate increase), as well as making the borrower aware of the CCPC’s mortgage switching tool and providing information on other products they provide which offer savings for the borrower. Where a borrower is facing an increase in the rate of their mortgage, they can seek to move to another product at their existing lender or switch to a different lender (noting this will be subject to the lending criteria and terms and conditions of the lender to whom they apply).

We are acutely aware that some borrowers will be anxious about the prospect of rising interest rates and potentially facing difficulties in meeting repayments on their mortgage. The Code of Conduct on Mortgage Arrears provides protections for both borrowers in arrears as well as those facing a prospect of arrears (‘pre-arrears’), be that due to interest rate increases or other factors, such as an increase in the cost of living. Lenders and servicers must be able to anticipate and identify cases of pre-arrears and draw up and implement procedures for dealing with borrowers, including offering alternative repayment arrangements.

We have made it clear to the firms we regulate that we expect them to be proactive in supporting their customers to navigate the changing economic environment. In particular, we expect them to support borrowers through this period of a rising cost of living and increasing interest rates by taking a customer-focused approach in respect of any decision that affects their borrowers.  Firms providing or advising on credit must ensure that credit is affordable (and in the case of mortgages, that they assess affordability on the basis of a 2 per cent interest rate increase, at a minimum, above the interest rate offered to the consumer). Firms must also identify consumers in vulnerable circumstances, including financial difficulty, and provide them with appropriate supports.

We expect firms to be well prepared to support consumers facing repayment difficulties. In particular, we are engaging actively with those non-bank firms that offer a more limited suite of products to ensure their approach is in line with our regulations and expectations.

Conclusion

These are challenging times for many. I encourage anyone who believes they are at risk of falling into arrears on their mortgage payments (as a result of rising interest rates or otherwise) to contact their lender/servicer. They are obliged to support you in assessing your financial position and, where necessary, identifying an appropriate and sustainable solution to any case of arrears or potential arrears.  We at the Central Bank will continue to ensure firms meet their responsibilities.

Gabriel Makhlouf

Read more:

• Non-banks: Learning from experience