Sick of our rip-off mortgage rates? I am too: and yet the EU could fix it if it wanted to...

TWO years ago, a very public battle played out over the price of standard variable mortgage rates in Ireland. Given that the average variable mortgage rate in Ireland in 2015 was almost 2% higher than the Eurozone average variable rate, people were rightly infuriated with the banks.

This was one of the greatest rip-off stories in post-crisis Ireland. Over time, banks made some reductions in mortgage rates and started to offer better deals on fixed-rate mortgage products. The public outcry then quietened and the media focus has since subsided.

However, merely because the banks have made some slight reductions in their rates does not mean that this issue no longer affects people. To this day, Irish people are still getting a raw deal on mortgage rates.

Scandal

The most recent figures show that the current average standard variable rate in Ireland is 3.26% compared with 1.83% in the Eurozone. The main ECB refinancing rate is 0%, so Irish banks, like Eurozone banks, are still getting cheap money in the low interest rate environment.

Unfortunately, Irish banks continue to charge a high price for variable mortgage rates to compensate for lossmaking tracker mortgages. The legacy of the banks’ decision to roll out tracker mortgage products in 2005 is something that will haunt the Irish economy for many years to come.

The recent tracker mortgage scandal was yet another stain on the banks’ reputation and shows how badly they have dealt with the problem of an abundance of tracker mortgages on their books.

This all points to a dysfunctional mortgage market in Ireland. As it stands, there is too little competition and no new entrants coming onto the pitch. Irish consumers essentially have a choice between five providers when it comes to getting a new mortgage. In the North, consumers can choose from over 20 providers.

And we must start to consider the prospect that ECB interest rates will eventually start to rise, thus driving up mortgage rates in Ireland yet again. Standard variable mortgage rates could climb above 4% in the years to come.

It is time for people to start thinking of shopping around the Eurozone for better value on their mortgages. We live in one of the most connected markets in the world – we have a common currency governing 19 member states and we have one Central Bank that controls monetary policy for all major banks in the Eurozone. Yet, Irish consumers have not been able to reap the full potential of the Single Market when it comes to financial products. Only 17% of Irish people have purchased a financial product in another EU country. Even less have bought a product on a crossborder basis.

In theory, there is no legal impediment to an Irish person walking into a Belgian or German bank and getting a mortgage for their Irish property. However, it is at the bank’s discretion whether to give a customer a mortgage or not. Typically, banks will not lend to a non-resident customer because they don’t have information on their credit history, because there are different insolvency laws from member state to member state and because often there are language barriers.

With a proper EU strategy to deliver a single market for mortgages, these are obstacles that can be overcome. If we consider that global financial institutions have been able to take advantage of the EU’s Single Market by moving large amounts of capital around the EU on a daily basis, why can’t consumers reap the same benefits?

So what are the building blocks to a single market for mortgages? Firstly, we need a harmonised system of consumer credit information. Every EU country has its own central credit register which collates information about all personal loans. If we had such a register on an EU basis, this would ensure that all banks in the EU would have access to credit information for new customers, regardless of where they live.

Secondly, we need common EU insolvency rules so that banks are aware of their legal obligations if a cross-border mortgage goes into arrears.

Thirdly, the EU needs to put in place rules that make it more difficult for banks to refuse mortgages to consumers on the basis of where they live. If banks refuse consumers, they must be able to provide a sufficient reason according to set EU criteria.

Resistance

Thankfully, the European Commission has acknowledged that there is virtually no single EU market for mortgages.

Last year the Commission launched its Consumer Financial Services Action Plan which aims to give EU citizens better products, better choice and better value by removing obstacles to cross-border financial services trade.

A slow process to build a single market for mortgages and other financial products is under way. However, the Commission faces resistance. Most member states flat-out resist opening up of the EU’s market for retail financial services. They do not like the idea of their citizens taking their business outside their country and they believe that their citizens won’t be afforded the same level of protection in other member states.

This mindset is dated. If we take roaming charges as an example, we can see the remarkable potential we have to develop the EU’s internal market.

We have an EU financial services action plan and a commitment from the EU Commission that it wants to push for a more integrated single market where consumers can buy financial retail products anywhere they want across the EU. Consumers want choice and value. And financial service providers are eager for a wider and deeper market across the EU.

So who can give us the leadership to cut through the protectionism and deliver real change? The Irish Government is the answer, specifically Leo Varadkar and Paschal Donohoe who can take the lead on this and become the political champions for a proper single market.

Effectively, the Government can now turn this issue into a major part of the debate on the future of Europe. They can demand that in the agreement about that future, likely to be decided in March next year, that the aim and political will around opening up the EU Single Market on financial services and specifically mortgage competition can be part of that overall agreement. It will, after all, be an agreement about the direction of Europe for the next ten years.

Specifically, it will be an agreement for the post-Brexit world, where the EU will have to become more competitive. And where the potential of the Single Market can be realised.

Our citizens, after all, should be able to reap the many benefits of living in an integrated single market. We have enough resources and expertise at EU level to ensure proper oversight of a more open retail financial services sector. If we fail to deliver on this, then Irish consumers could be left dealing with a dysfunctional mortgage market for many a year to come.