Expert urges variable-rate mortgage ban for new buyers
Published 02/06/2011 | 05:00
VARIABLE-rate mortgages should be banned for all new buyers, who should now be forced to take out long-term fixed rates, a leading housing economist has said.
Banning variable rates would help avoid a future property bubble as changes in European Central Bank rates would then have little impact on household budgets, said economist Ronan Lyons.
First-time buyers should also be forced to have a minimum deposit when buying a house.
Having to put up 8-10pc of the value of a property before buying would mean new buyers would be less likely to get into negative equity -- where the value of their mortgage is greater than the value of their home.
Membership of the eurozone left Ireland with very few ways of preventing future housing bubbles, Mr Lyons, of the property website Daft.ie, said.
This is because the ECB sets interest rates that are appropriate to larger countries like Germany and France, even if the rates it sets will harm Irish homeowners.
ECB interest rates were too low for Ireland when the bubble was inflating, and are now rising as thousands are struggling to meet mortgage repayments.
Ireland and Portugal are unusual in Europe as around eight out of 10 mortgages are variables.
In this country, around 650,000 of the almost 800,000 people with a mortgage either have a tracker or a standard variable rate.
Banks here have repeatedly upped standard variable rates, at a time when the ECB rate has only moved once in two years.
Just last week, Ulster Bank said its variable rate would rise by 0.6pc in July, pushing up the monthly repayments on a €300,000 mortgage by €100.
In Germany, a minority would have a variable rate, with most homebuyers locked into 20-year fixed rates.
"We should ban variable rate mortgages. Many countries in the world have mortgages where the interest rate is fixed for the lifetime of the mortgage," Mr Lyons said.
He added that, in the US, what were known as adjustable-rate mortgages were viewed in the same light as subprime mortgages.
The absence of long-term fixed mortgages in Ireland was a throw back to pre-ECB membership days, when banks were unsure of what the costs of funds would be over time. Banks want homeowners on variable rates so they can adjust mortgage costs to match their funding costs.
If home buyers were on 20-year fixed rates, they would be better able to budget as they would know from day one what their mortgage would be.
Forcing people to save up a 10pc deposit would make it easier to ensure people could afford to buy. There was also a need for a property tax based on the value of the land the home was built on.
"By penalising the hoarding of land, a land-value tax is another tool to stave off future property bubbles," Mr Lyons said.
This would force those who were under-utilising land that could be built on to pay up. And taxing the land rather than the house would mean there would be no disincentive to improve the house.