Monday 19 August 2019

Dr Ali Uğur: 'There are sound reasons for higher home loan rates'

'Referencing mortgage arrears, this is another measure on which Ireland unfortunately sits close to, if not at, the top of the European table.' Stock photo: Getty Images
'Referencing mortgage arrears, this is another measure on which Ireland unfortunately sits close to, if not at, the top of the European table.' Stock photo: Getty Images

Dr Ali Uğur

We need to look beyond the headlines on Ireland's mortgage rates.

Media reports that average rates are among 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.

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Thisi is not the only league 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 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 in Europe.

A recent Goodbody report calculated lenders here effectively hold €50 for every €1,000 they lend out in mortgages compared to a European average of just €16. So straight away the costs facing lenders here are significantly higher.

Referencing 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 (to end of March 2019) show some 44,000 mortgage accounts (6pc 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 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. It is a cost not faced to anything like the same extent by lenders in other European markets.

A third European table with Ireland around the top shows 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 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, 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).

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.

Since lenders here face considerably higher costs in key components of the business of mortgage lending, it should come as no surprise 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. 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 is Finance Ireland. A quote from its chief executive, Billy Kane, to a Sunday newspaper 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."

Any and all new mortgage lenders 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 that necessarily affect mortgage pricing.

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. This is a matter of considerable concern.

Dr Ali Uğur is chief economist with Banking & Payments Federation Ireland (BPFI), which represents the banking, payments and fintech sector in Ireland

Irish Independent

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