Michael Noonan, the finance minister, has criticised Bank of Ireland and Danske bank for charging above average rates on their historic variable mortgage loans.

The finance committee yesterday scrutinised new legislation aimed at tackling the high rates for 300,000 mortgage holders who are paying an average of 1.5 per cent higher than borrowers in other EU countries.

It is the first time a bill has been brought to pre-legislative stage; a new process that allows draft legislation to be examined before it is turned into law, allowing all members of the Dail to have an input.

The Fianna Fail bill was the first piece of legislation that passed second stage when the Dail was formed in May following weeks of difficult negotiations.

Mr Noonan admitted the government only accepted the bill to avoid an embarrassing defeat for the minority coalition.

“There was a desire not to have the coalition defeated so early in the life of the government but there was also agreement on the principle of the bill,” he said.

“Everyone thought certain lenders were applying mortgage interest rates that were too high and there was a commonality of purpose to see if we would get them down.

“The government position was that if we had a majority we probably would have opposed the bill, I think everybody knows that, but we share the aspiration to reduce variable mortgage rates.”

Michael McGrath, Fianna Fail’s finance spokesman and author of the bill, told the committee that the legislation would empower the Central Bank to lower an “unjustified” mortgage rate.

“There are undoubtedly rates being charged in the market today that are exploitative and cannot be justified. The bill is designed to deal with those outliers and the egregious situations where people are paying rates that cannot be justified,” he said.

Mr McGrath said banks in Ireland can charge customers up to five per cent to borrow money when the financial institutions are accessing the money at rates close to zero.

While legislation being examined normally sees the minister being questioned about a bill, Mr McGrath faced questions from the finance minister yesterday.

Mr Noonan told his Fianna Fail counterpart he disagrees with the general thrust of the bill and said the problem could be solved by increased competition. But the finance minister agreed there are still outliers in the market.

“I don’t disagree with your analysis; there are some lenders that are charging too much,” he told Mr McGrath.

“There is a discrepancy, particularly with banks like Danske. It has pulled out of the Irish market, now it is trying to collect as much as it can from its historic loan book. Bank of Ireland, no matter what way we talk to them, they are not removing that very high rate for older mortgages but they have moved significantly on new mortgages.”

Mr Noonan claimed the bill, if passed would be open to legal challenge.

“All I’m saying is there is an issue and you need to get legal advice. The Central Bank made it clear that they don’t want this power and they also seemed to hint that if they got the power, they might not use it. There is no point giving them power if they don’t use it.”

The finance minister came under fire from the committee for claiming bank shares had dropped by 10 per cent as a result of the bill being brought before the Dail. Mt Noonan said he had been given evidence from the department of finance to back-up the position.

“It’s very hard to explain market movements but there was a cause and effect relationship. And the advice I got was that there was a 10 per cent reduction on average across bank shares at the time and it was attributable to the Dail being willing to enact this bill.”

Mr McGrath dismissed the claim as nonsense. “It was a bogus claim and you shouldn’t try to defend it,” he said.