Media reports that average mortgage rates in Ireland are amongst the highest in the EU may well be accurate. But when such reports do not explain the factors why this may be so, they do nothing to further a better understanding of what needs to happen in order to give rise to lower average mortgage rates here.
The EU table of average mortgage rates is not the only table in which Ireland is placed close to the top. Ireland also sits close to the top of the EU table for the amount of capital which mortgage lenders have to hold for each and every new mortgage loan they make. The more capital they have to hold in this way, the more it costs them to make those loans.
Arising from the financial crisis, and in particular the legacy of a considerable mortgage arrears problem, lenders in Ireland are today required by supervisors to hold a great deal more capital than their counterparts elsewhere in Europe. As the Chart shows, Ireland sits towards the top of the European table. Put another way, a recent Goodbody report calculated that lenders here effectively hold €50 for every €1000 they lend out in mortgages compared to a European average of just €16. So straight away the costs facing lenders here are significantly higher than elsewhere in Europe.
Chart: Average level of capital which must be held against property lending
Source: Davy calculations, EBA Transparency Exercise December 2018
Reference mortgage arrears, this is another measure on which Ireland unfortunately sits close to, if not at, the top of the European table. The latest Central Bank statistics (end-March’19) show that some 44,000 mortgage accounts (6% of total) are in arrears of more than 90 days; with 27,979 of these in arrears of more than 720 days. While considerable progress continues to be made in addressing mortgage arrears, particularly in the form of more than 110,000 mortgages currently restructured by lenders, the number still in arrears presents a most unwelcome challenge to borrowers and a major cost to lenders – a cost not faced to anything like the same extent by lenders in other European markets.
A third European table which shows Ireland around the top is that showing the typical length of time it can take for lenders here to repossess a property for which mortgage debt is in default. The longer this process takes, the greater the cost to the lender.
Our courts process provides protection to borrowers over and above that available in many other jurisdictions. According to Standard & Poor’s, the full legal process for repossession can typically take as long as 42 months in Ireland, considerably longer than in other European countries such as the UK (18), Denmark (18), Norway (18), Sweden (18), Finland (24), The Netherlands (24), Austria (30) and Germany (30), for example. This has the effect of undermining a lender’s access to its security or collateral which is the very basis of secured lending at more favourable rates than ordinarily apply to unsecured lending. So, once again, we see that lenders in Ireland are faced with higher costs than lenders elsewhere in Europe.
Since lenders here face considerably higher costs in key components of the business of mortgage lending, it should come as no surprise that this would be reflected in the average rates charged to borrowers. Of course, a straight comparison of average interest rates alone does not, in itself, provide the complete picture in that it does not take account of non-interest rate factors. For example, arrangement fees – which do not apply in Ireland – increase the cost to borrowers in countries where they apply.
Which brings us to the issue of competition and its role in bringing downward pressure on pricing. As the representative body for all firms licensed to provide financial services in Ireland – domestic and international – BPFI supports open and effective competition in the marketplace. And we openly welcome new players to the marketplace who can further enhance competition to the benefit of borrowers and lenders alike.
One of the most recent and welcome arrivals to the mortgage market is Finance Ireland. A quote from its Chief Executive, Billy Kane, to a Sunday newspaper around that time is notable however: “If the spread between mortgage rates in Ireland and elsewhere wasn’t justified, international banks would be rushing in to lend here which hasn’t happened.”
The reality is that any and all new mortgage lenders entering the Irish market face broadly the same cost considerations as existing lenders in terms of the capital to be held against lending and the length of time taken to repossess property. And these are costs which necessarily impact on product pricing – in this case the mortgage product. Addressing these costs will have implications for the provision of appropriate, competitively priced, residential mortgage finance into the future. Unfortunately, certain recent legislative proposals actually risk deterring further competition; and this is a matter of considerable concern.