Thursday 27 October 2016

Dan White: Michael Noonan must hit the banks with profit tax to protect borrowers

The savage eye of Michael Noonan
The savage eye of Michael Noonan

It was utterly cringe-making listening to Taoiseach Enda Kenny in the Dail yesterday as he tried to disguise the fact that the banks have largely ignored the Government’s demands that they cut variable mortgage rates.

Rarely has the Government of the day been so utterly humiliated by the banks. Was I alone in feeling embarrassed as a citizen?

The July 1 ‘deadline’ set by the Government for the banks to cut their variable mortgage rates has come and gone with only AIB – which, probably not entirely coincidentally, is 99.8pc State-owned – cutting its standard variable mortgage rate by a minuscule 0.25pc.

The other banks have given the Government the two fingers. Permanent TSB has announced that it will cut its variable mortgage rate by up to 0.8pc to 3.7pc, but only customers with a large proportion of equity in their homes will see their monthly repayments fall by even a fraction of this amount.

Meanwhile, Bank of Ireland and KBC Bank are offering their home loan customers lower rates – but only if they switch to fixed-rate mortgages which tie them in for several years.

These aren’t genuine rate cuts, just gimmicks designed to create the illusion of lower mortgage interest rates.  

Now Finance Minister Michael Noonan is dropping hints that in next October’s Budget the Government will “do something” about banks which fail to cut their variable mortgage rates.

According to the usual “government sources”, the Government is contemplating raising the bank levy as a way of punishing lenders for their failure to variable mortgage rates.

Oh, come off it Mr Noonan, why don’t you try pulling the other one?

Raising the bank levy is not a credible threat – and the banks know it. An increase in the bank levy would hit all banks, not just those which have refused to cut their variable mortgage rates. What’s needed is a measure that specifically targets those lenders which refuse to cut their variable mortgage rates.

Can this be done? Of course it can –  and it’s not half as difficult as the Government would have us believe.

At the moment the official ECB interest rate is just 0.05pc. This compares to the average variable mortgage rate of 4.26pc. Not to put too fine a point on it, but the banks are fleecing their variable rate mortgage customers –during the Celtic Tiger years the banks typically charged 1-2pc over ECB rates for variable rate mortgages.

What the Government should do before the Dail breaks up for the summer is to introduce a new mortgage excess profits tax. This would restrict the banks to a margin of 3pc over the official ECB rate, ie capping variable rate mortgages at 3.05pc.

Any variable rate interest over 3.05pc would be treated as excess profits and taxed at a rate of 200pc. Just to further tighten the noose around recalcitrant banks, no deductions should be allowed against this new tax.

The beauty of a mortgage excess profits tax is that it would hit the banks with the highest variable mortgage rates the hardest. Banks that cut their variable mortgage rates to 3.05pc or less would be completely unaffected.

In addition, by taxing mortgage interest over 3.05pc as bank profits rather than as excise duty – as is the case with credit cards and cheque books – it would be impossible for the banks to pass on the new tax to their mortgage borrowers.


A reduction in the average variable mortgage rate from the current rate of 4.26pc to 3.05pc would cut the monthly repayments on a 25-year €200,000 mortgage by €131 from €1,085 to €954. This would leave the borrower €1,572 a year better off.

So why doesn’t the Government be done with it and just go ahead and introduce a mortgage excess profits tax? By setting deadlines that the banks have felt free to ignore and then anonymously proposing remedies such as an increase in the bank levy that it knows full well won’t work, the suspicion must be that the Government is once again putting the interests of the banks ahead of those of borrowers.  

If this is in fact the case then ministers will have no-one but themselves to blame when they pay the political price in the forthcoming general election

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