The Government may seek a guarantee for tracker mortgages from the European Stability Mechanism, according to reports.

A source told Bloomberg news agency that an ESM guarantee would allow the loans to be funded at the European Central Bank with smaller discounts.

Tracker mortgages are estimated to cost lenders around €750 million a year.

Any reduction in the cost of funding them would help banks return to profitability, which in turn would make the State’s stake in a number of institutions easier to sell.

A spokesman for the Department of Finance told Bloomberg that a number of options were being explored but declined to make further comment.

The Government wants the ESM to refund as much as €30 billion that was spent saving the banks at the start of the financial crisis.

German Finance Minister Wolfgang Schaeuble said in June that ``the capacity of the ESM is limited,'' suggesting that Ireland faces resistance to its campaign for retrospective recapitalisation of its lenders.

That has led the Government to examine other options around tracker loans.

The International Monetary Fund has suggested that guarantees could be used to lower the cost of the mortgages, however Ireland would need to win the support of its European colleagues for such a plan.