Now you got me feeling all European !
Is it the good weather ?
No, come on, you know we don't talk about the weather here. Finance Ireland have introduced a new range of fixed rate mortgages to the Irish market. The terms of the fixed period can go up to 20 years. The rates range from 2.40% to 2.99%. The rates depend on the term and the LTV of the loan. The LTV can go up to 90% which makes this product broadly available.
And the European comment ?
Traditionally the choice in Ireland has been between variable rate and fixed rate. But the fixed rate choice was generally for something like a three year period. Typically after that, the mortgage rate would revert to a variable rate. This kind of choice was similar to the UK market.
I remember speaking to Belgians working in Ireland years ago and they expressed surprise at this. They talked about how it was possible in Belgium to get a fixed rate mortgage for thirty years. The rates were low. This meant every mortgage payment for the life of the loan was the same. At the time, there was a huge gap between the way the mortgage markets functioned. But the move by Finance Ireland got me thinking about how far we are away from an integrated European mortgage market.
What does a European mortgage market look like ?
It might mean the end of the monthly articles pointing out that Ireland is one of the most expensive countries in Europe for mortgages. The rates on new mortgages here at the time of writing are 2.79% versus a euro average of 1.30%. Actually this gap would be even bigger if base rates in Europe weren't so low. With rising interest rates, this gap will grow.
Think about buying a property abroad? Currently the Irish lenders are comfortable with verifying your income but don't generally have the capability to lend against property abroad. A Spanish lender may be happy to lend against the purchase of a property in Spain but will run into difficulties in verifying your income in Ireland. An integrated market fixes these issues. Think for example of a Bank of Ireland mortgage centre in Madrid or a Banco Santander mortgage centre in Dublin. These lenders which generally operate domestically could become pan-European lenders. Good for the consumer. Currently we do not have enough mortgage lenders in Ireland. Other countries have similar issues.
Sounds good - what are the obstacles ?
The product types remain very different across the European countries. For example, the "cash-back" option that we see here in Ireland is forbidden in other European countries. This is because it has a tendency to pull customers away from judging which mortgage offer is in fact the cheapest. In some countries, prepaying a mortgage is not allowed during a certain period. In other countries, mortgage offers are only available if you are a customer of the lender.
Nothing that seem insurmountable here - what else ?
A difficulty for foreign banks entering a new mortgage market is getting credit history for their customers. Sometimes there is a public register of credit history. For example, in Ireland we have the Irish Credit Bureau, the ICB. This shows a persons history of repayments. In other countries, private companies are used to access this information.
There is an in-depth knowledge of the local market required to assess things like the confidence that can be put in a person's salary or their ability to replace it should they lose their job. In general for new lenders, there is a risk of adverse selection. The borrowers who struggle to secure lending with the domestic lenders will migrate to the new lenders.
But what happens when people stop paying their mortgages is the biggest difference
You mean the lenders seizing your property ?
In the U.S. and in Spain, the foreclosure process is favoured. This is obviously in the lender's favour. However, for example, in Ireland, we have an out-of-court process which favours keeping people in their homes on reduced payments. These are large differences.
A recent BPFI report found that recovery rates at the end of the judicial process in Ireland were 11% in Ireland compared to 46% for the euro-area on average.
So this will take time ?
Yes, exactly. Because Europe is becoming more integrated in many ways, we are watching each other closely. Attractive features in some markets are copied in others - like we see with Finance Ireland long-term fixed rates. Also, gaps in pricing are closely followed and commented on. The gaps will not become so large as new entrants will come to take advantage of it at certain levels. However, also more subtle points, like how expensive it is for bank to lend against property in Ireland versus say in Belgium (currently : a lot more) is being looked at by the ECB. Over time, things will come closer and closer.
Come and speak to us at AM Financial
Whilst we dream of sunny beaches in Europe, come and talk to us at AM Financial. We are currently closing mortgage deals in Skerries, Lusk, Swords and Malahide. Before setting up any sunny Spanish getaways, secure your base here first !