The decision by the Saeima Budget and Finance Committee to support amendments to the law and provide a 50% discount on consolidated interest rates on mortgage loans for one year presents a high risk of constitutionality and international litigation, says the head of Bank of Latvia Monetary Administration Uldis Rutkaste.
He believes it is necessary to provide support to mortgage loan takers due to the growth of interest payment amounts, especially because Latvia has the some of the highest interest payments in Europe because of insufficient competition among banks. However, the chosen support mechanisms have to be focused and proportionate.
Amendments to the Consumer Rights Protection Law that provide a 50% discount for mortgage loan interest rates is not considered proportionate – first of all because it is planned to be provided to all borrowers.
Although in the legislative draft it is suggested to set the threshold for the maximum amount of loan balance at EUR 250 000, the Bank of Latvia believes this is not specific enough, because households’ income and expenses are not taken into account. By not including income/expenses criterion in this decision,
this support will mainly reach wealthy mortgage loan borrowers,
because 83% of housing loans were issued to households with relatively higher income, as concluded in the presentation by the Bank of Latvia.
Rutkaste also says that the Bank of Latvia did present its idea for support criteria at the meeting of the Budget Committee. These criteria would be applied to borrowers in order for them to become eligible for support. However, members of the committee rejected this proposal and instead voted in favour of providing support to all borrowers.
According to Rutkaste, Saeima’s Legal Affairs Office and the Ministry of Justice also mentioned the risks of litigation coming from this legislative draft.
Rutkaste stresses that focused support for mortgage loan borrowers should come from commercial banks, not the state budget. If this legislative draft comes into force and is challenged in the Constitutional Court, and the verdict turns out not in favour of the state, all taxpayers will pay for it.
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