WHEN THE FIVE main Irish banks announced in March that they would allow for an initial three-month mortgage payment break for customers as a result of the pandemic, it was broadly welcomed across the political spectrum.

Much to the relief of many borrowers, the payment holiday was then extended in April for a further three months.

By the end of May, the Banking and Payments Federation of Ireland (BPFI) — the main lobbying group for the banking sector — said that close to 80,000 mortgage customers had availed of the moratorium.

The Central Bank said today that close to 160,000 borrowers have now applied for payment breaks.

Now, a controversy over the application of extra interest charges to mortgages during the break period threatens to undo a lot of the good publicity that the banks had enjoyed in recent months.

So what’s the issue?

The issue, in a nutshell, is that customers who opted to temporarily park their mortgage payments under the moratorium are still being charged interest by their banks.

It means that anyone who availed of the break could effectively end up forking over more money to their bank over the course of their mortgage term than if they had opted to keep up with monthly repayments.

In a blog post published at the beginning of May, head of communications at price comparison site Bonkers.ie Darragh Cassidy explained the situation in simple terms.

“Interest will still be charged on your mortgage during [the break period] meaning you’ll end up having to pay back even more to your bank over the remaining term of your mortgage,” Cassidy explained.

He explained that customers won’t necessarily have to pay the interest back in “one lump sum”. It’ll be added on to your usual monthly mortgage repayments after the three or six months are up and spread over the rest of your mortgage term.

“This means many people may not notice that much of a difference. However, it all adds up.”

Using a simple example of someone who had a remaining mortgage of €300,000 over 30 years at a 3.2% interest rate, Cassidy claimed that they could end up paying back €4,300 in extra interest payments.

In April, Sinn Féin finance spokesperson Pearse Doherty told the Dáil that he had heard from one Permanent TSB customer who had applied for a three-month reprieve and faced being saddled with an extra €7,739 in interest charges.

How did the banks justify the extra charges?

Well, this is where it gets a bit tricky.

Oversimplifying it for a second, the banks have said that regulations issued by the European Banking Authority (EBA) actually require them to charge interest during the moratorium.

Why? Because, they claimed, without charging interest, the rules stipulate that they would have to classify those mortgages as being ‘in default’.

Obviously, that could have a knock-on effect for borrowers and their credit scores down the line.

Probably the most important feature of the payment break is that it can’t be held against the borrower in the future.

As early as 31 March, the Central Bank confirmed that anyone availing of the break would not be marked down as having missed payments nor would it have any impact on the consumer’s credit score.

So the banks were able to say that by charging interest during the break period, they were preventing blowback for their customers.

Ok, so why is that so controversial?

In recent days, a number of developments have significantly undermined the banks’ claim that they were obliged by EBA regulations to apply the interest charges.

At Tuesday’s sitting of the Dáil Special Committee on Covid-19, Central Bank governor Gabriel Makhlouf was questioned on the issue by Sinn Féin’s Doherty.

The Donegal TD has been particularly vocal for a number of months and even published draft legislation aimed at rectifying the issue in June.

In response to Doherty’s queries, Makhlouf confirmed on Tuesday there was no such obligation for the banks to charge interest during the break period.

But Doherty had already received confirmation of the same from Makhlouf’s deputy governor Sharon Donnery in June. Correspondence between Donnery and Doherty was published on the Central Bank website.

Also on Tuesday, the EBA released a statement confirming that waiving these interest charges would not force borrowers into default.

There’s also the small matter of a meeting that took place between the heads of the Irish banks and then-Taoiseach Leo Varadkar and Finance Minister Paschal Donohoe on 11 May.

Over the weekend, the Business Post reported on the minutes of that confab at which the banks reportedly told the Taoiseach that the regulations require them to charge interest during the payment breaks.

Doherty has now accused the banks of misleading the Taoiseach, which the BPFI rejected in a statement yesterday.

The BPFI said that Irish lenders have been “clear and upfront” in outlining the type of payment breaks available to customers and how they would apply in line with EBA Guidance.

Speaking in the Dáil today, Tániste Leo Varadkar denied that the banks had misled him during the meeting on the 11 May.

“I haven’t seen the minutes but I was at the meeting,” Varadkar said, “and I have to say that the banks never claimed that they couldn’t waive interest for that period.

“They did say that it would be possible to waive interest for that period. The issue that they had was that someone had to pay for the cost of the payment break.”

So have the banks broken any rules?

No, they haven’t.

The existing rules gave the Irish banks the option to charge or not charge their customers during the break period.

So when former Fine Gael MEP Brian Hayes, who is currently chief executive of the BPFI, said in a statement yesterday that the charges are “fully in line with EBA Guidance”, he was absolutely correct.

However, critics of the charges — like Doherty and Labour Party leader Alan Kelly — have raised the question of propriety.

“Charging interest accrued on loan payment breaks during Covid-19 is the banks profiteering on the pandemic,” Doherty said yesterday.

In the Special Dáil Committee on Tuesday, the Donegal TD said that in Belgium, “KBC voluntarily for low-income borrowers do not charge interest rates during the break. KBC here charge interest rates for customers in Ireland.”

BPFI countered, arguing that apart from Belgian and Spanish banks, most European financial institutions are charging borrowers interest during the break period.

It’s not just politicians who are expressing their frustration with the banks.

On RTÉ’s Today with Sarah McInerney yesterday, financial planning expert Eoin McGee opined that “the banks here just take every opportunity they can to get things wrong when it comes to dealing with the public”. 

Yesterday, Hayes said that Irish lenders have gone “above and beyond” what other European banks have been doing for their customers. 

Varadkar said today that he told the banks in May that, “If it turns out you make an additional profit out of this… I would see that as serious as the scandal of the tracker mortgages and I would come down on them like a tonne of bricks”.

Regardless, the banks have given no indication that they plan to change to practice.