AS pressure mounts for the banks to pass on interest rate reductions to fixed-rate mortgage borrowers, the Government should turn a deaf ear to the controversy. With most of the banks likely to be majority state-owned shortly, the cost of any "rescue" for fixed-rate borrowers would be largely borne by taxpayers.

Since the European Central Bank belatedly started cutting interest rates in October 2008 it has slashed eurozone interest rates from 4.25pc to just 1.25pc. This has resulted in huge savings for most homeowners on variable-rate mortgages.

Someone with a €300,000 variable-rate mortgage repayable over 30 years has seen their monthly repayments plunge from €1,750 per month to just €1,224 per month, a saving of more than €500 per month.

Meanwhile, the tens of thousands of homeowners who are locked into fixed-rate mortgages can only look on enviously as they continue to pay the previous, higher rates. Not surprisingly, with household budgets stretched as tight as a drum, some fixed-rate mortgage holders have argued that the banks and/or the Government should "do something" about the plight of fixed-rate mortgage borrowers.

As things currently stand any fixed-rate mortgage borrower who seeks to switch to a variable-rate mortgage must pay his or her bank a hefty penalty. Some borrowers have found themselves facing penalties of €15,000 or even €20,000.

So what should the Government and/or the banks "do" about this situation?

Preferably as little as possible.

Let's get real here. We're all consenting adults. The vast majority of those who took out fixed-rate mortgages knew exactly what they were doing. They wanted the security of knowing that their monthly repayments wouldn't increase if interest rates rose. And, when the ECB raised interest rates from 2pc to 4.25pc between December 2005 and July 2008, they reaped the benefit. Meanwhile the vast majority of homeowners who had opted for variable-rate mortgages had no option but to pay up.

Now that the boot is on the other foot it is fixed-rate mortgage borrowers who are losing out. Having been the beneficiaries of rising interest rates up to the middle of 2008 they are in a poor position to complain now that rates are falling.

penalty

Would those who now seek to get the Government to "do something" about fixed-rate mortgages propose that these borrowers return the gains that accrued to them from not having to pay the higher rates between 2005 and 2008? Would they what?

Releasing fixed-rate mortgage borrowers from their obligations is not a cost-free option. When someone fixes their mortgage rate the bank then goes out and buys a contract on the financial markets, which in turn fixes the rate at which it borrows the money.

If the borrower then changes his or her mind and decides to switch to a variable-rate homeloan, the bank must go out and cancel that contract. To do so it will have to pay a penalty. Call me old-fashioned but I believe that the banks are entitled to recover that cost from the homeowner.

As the banking crisis has intensified and public anger at the mismanagement of the banks has mounted, it has become fashionable to beat up on the banks. Several bank bosses have been forced to quit and the pay of those who remain has been capped.

All well and good but, with their mounting loan losses likely to mean that most of the banks will shortly be majority-owned by the state, we should be careful about what we do to the banks. Whether we like it or not, to all intents and purposes you and I now are the banks.

This means that the cost of releasing fixed-rate mortgage borrowers from their obligations would effectively be paid by the rest of us, including variable-rate mortgage borrowers.

By all means let the banks be flexible. One possible alternative is for the banks to add the cost of switching to a variable-rate to the amount owed on the mortgage. However, the rest of us shouldn't have to bear the cost of those who bet wrong on interest rates.

- Dan White