Mortgage holders here pay more for their loans than other borrowers around Europe, partly because of the high level of loss-making trackers still in the banking system.

That’s according to a report from the Department of Finance, which looked at the reasons for the disparity between mortgage rates here and elsewhere.

"Trackers, which are still just over 40% of all mortgages outstanding, help explain why the average overall mortgage interest rate in Ireland is nearer 2.5% according to ECB data, with the European average at around 2.1%," it says.

But the report says that while it is widely known that Irish borrowers pay more for home loans than others in Europe, what’s less well understood is that the lenders here must carry more capital per mortgage than banks elsewhere in the EU.

This, the study says, is the consequence of the very high level of historic losses in the financial institutions here.

In 2017 the Competition and Consumer Protection Commission described the Irish mortgage market as quite dysfunctional from both a competition and a consumer perspective. 

It added that it did not believe there are immediate remedies that will reduce mortgage rates and fix the other dysfunctional aspects of this market.

In actual terms, the department's analysis shows that banks must hold up to three times more capital on mortgages than their peers in Europe, and this difference results in interest rates that are up to half a per cent higher here.

When it comes to a new mortgage lent today, for example, a bank here may have to hold up to five times more capital than they would have on a similar loan issued 12 years ago.

This, the report says, is despite the lower risk attached to loans issued today, because of the more stringent lending conditions that are in place.

The knock-on effect, according to the study, is that lending margins need to be higher in order to achieve an acceptable return. 

The report says that as Irish banks reduce their bad loans, the risk weightings on such loans will fall, allowing rates to fall.

But it cautions that performing loans will continue to carry a higher than average risk weighting for years to come, until the financial legacy of the crash works through the system.

Minister for Finance Paschal Donohoe has asked officials to probe whether any changes can be implemented which would result in the cost of the extra capital being reduced, so that interest rates can fall.

Trackers are not considered to be the only reason behind high mortgage margins here, with the Central Bank also pointing previously to the high concentration and low level of competition in the banking market here.