A draft report by the European Commission, seen by RTÉ News, has stated that it is important to allow Irish banks sufficient leeway in setting mortgage interest rates.

The report is the third review of the Irish economy post the bailout programme and was carried out from 27 April to 1 May this year.

The report found that standard mortgage rates in Ireland are relatively high due to credit risks of non-performing loans and legacy assets.

However, it states that continued pressure on the banks to cut rates may undermine financial sector stability by reducing bank profitability and impact future privatisation prospects.

It also says it could have negative implications for market competition by discouraging new entrants. It states it is important efforts to promote bank transparency in this area are welcome.

It also noted the Central Bank's new residential mortgage regulations which it states aim to lower the risk of a new credit fuelled housing price boom from developing.

Under the Central Bank rules, borrowings by first-time buyers up to €220,000 will be approved with a deposit of 10%.

But any amount over €220,000 will require a 20% deposit for the portion of the mortgage.  Non first-time buyers will have to come up with a 20% deposit.

The Commission states that it is important to monitor the regulations especially the more favourable treatment given to first time buyers and their default rate.

It also suggests that regulations for the commercial property market sector should be considered to alleviate the risk of a return to unsustainable commercial property lending. 

Speaking on RTÉ's Six One news, Finance Minister Michael Noonan said that he has met with the six main lenders who have all moved and that people now need to look at the competitive rates, adding there is also a case to be made for fixing loans.

Number of repossessions 'low'

On the issue of repossessions it notes that voluntary engagement between lenders and debtors has improved and points to the new Government measures to support those in arrears and boost the low use of the insolvency process.

However it says that the legal system slows the resolution process of debts with numerous adjournments and a large number of pending cases.

Overall, it says while the banks have stepped up their efforts, the overall number of repossessions is low with the majority voluntarily surrendered.

It states a surge in repossessions is not expected but a steady rise may continue due to the amount of protracted arrears cases.

It suggests careful supervision of the banks resolution efforts and also proposes efforts to make legal proceedings more efficient.

Potential to increase property tax revenue

The Commission also says there is potential to further raise property tax revenue.

It says recent increases in house prices mean the yield from the tax should increase, however it says the 'authorities aim to maintain the current revenue and high rate of compliance of approx 95%.

The Government it says is emphasising the need to maintain taxpayer acceptance over extra revenue generation.

The Commission also states the yield on VAT remains low in comparison with other member states because of extensive use of reduced rates and exemptions in Ireland.

It says we could move to a more limited use of exemptions and reduced rates.

Spending on drugs needs to be decreased

It also states that further efforts are needed to reduce public expenditure on drugs and to improve cost effectiveness in healthcare.

The Commission states budgeted savings on patented medicines of around €40m will not materialise in 2015 and other health reforms progress at varying paces. 

It states that it is unclear when results of an ESRI review of universal healthcare will be made public and uncertainty continues to surround UHI.  

It says the prospects of legal services regulation bill being enacted have improved and a final push is needed as it is an important step in reducing legal costs.

Irish Water compliance 'unclear'  

The report also notes that Irish Water has started sending bills and it is unclear what the level compliance will be. 

It adds that the ability of the Government and Irish Water to explain further the rationale for the reform and demonstrate that the public utility model is best to deliver high quality infrastructure in the most cost effective manner will be critical.

The report points out that Irish Water has been provisionally classified within general Government accounts and its position will be clarified by Eurostat in October.

It says the provisional inclusion of Irish Water increased the deficit by €338m in 2014 and likely by €581m in 2015 but adds the classification has not compromised compliance with fiscal rules.

It says preserving Irish Water's ability to deliver on its capital investment programme is key given economic importance of this infrastructure.

Overall the Commission says good progress has been made on its previous recommendations.

It says public finances continue to improve, it notes falling unemployment while investment and construction have accelerated and consumption has picked up.

The report states that property markets continue to recover with some regional variance.

It also states that if cash returns continue to be as strong as in first five months, tax revenues could up exceeding estimates for 2015 as a whole by a considerable margin.

It goes on to state that the main risks to fiscal projections are persistent spending pressures and meeting demands in public services including wages increases.

It notes that wages pay increases over next three years in the Lansdowne Road Agreement provide safeguards for a gradual wage bill rise but says there could be additional pressure on public pay could arise.