Homeloans are expensive but what we need are longer, lower fixed rate ones

Personal finance columnist Jill Kerby this week looks at mortgages and why they are so much more expensive in Ireland than other European countries...

Imagine being a first time homebuyer in say, Finland. “Too cold, too dark, too expensive”, I hear you say.

Okay. How about Portugal with its sunshine, blue skies and considerably lower cost of living?

In Finland, assuming you have put together your downpayment and have a very good bank credit record, you just might qualify for a new weighted average variable mortgage interest rate of c0.7% this month. In Portugal, you would pay more for the cheapest variable loan going – about 1.08%.

Here in Ireland, without the copious snow and sunshine, you can now expect to pay about 2.79% for your variable rate mortgage, says the Central Bank, and even less, 2.67% for a fixed rate loan, typically for three years. In the euro area (See the chart) the average 10-year fixed rate is just c1.88%.

Mortgage experts continue to decry the fact that we pay at least twice as much for home loans than people do in the rest of Europe. In its latest, third quarter review of retail statistics, the Central Bank notes: “The average [variable rate] for the euro area stood at 1.33 per cent in October, although the rate varied considerably across countries.”

Why is this, even as the Irish economy appears to be in a far better position than so many of our eurozone neighbours, with a strong third quarter GDP recovery, lower unemployment and a much stronger than expected tax base?

“There is still a lack of competition in the Irish mortgage market as it remains heavily concentrated in the hands of a few main banks; namely AIB and Bank of Ireland, who have a duopoly-like grip on the market,” suggests Darragh Cassidy of the price and product comparison website www.bonkers.ie

“And although competition has improved in recent times, particularly with the arrival of Avant Money, it's still below where it needs to be. The issue around home repossessions, and the inability of banks to take back a property if the loan has gone bad, is also a factor in Irish mortgage holders facing higher rates. Banks are also still dealing with the cost issues and capital requirements regarding bad loans on their books from the last financial crisis.”

Cassidy worries that “the Covid-19 pandemic is going to worsen this problem, leading to upward pressure on rates again in the near future”. He could be right about this, except that tightening rates could lead to a tsunami of corporate and personal bankruptcies in every country where zombie companies are only still around because they’ve had access to near zero rate credit and other government ‘stimulus’ measures.

What happens next year or the year after about the trillions of 'printed from thin air' dollars, euro, yen, etc that has flooded into the debt and capital markets as a result of the great pandemic, is still anyone’s guess.

Some predict a massive spending surge as our Sleeping Beauty economies come back to life as the vaccines are rolled out and people (who didn’t lose their jobs) are encouraged to spend some of their pandemic savings (Near zero interest rates will encourage that spending too).

If any of the rules of economics still apply (and frankly, I have my doubts) any great spending wave in 2021-22 will eventually push up the price of goods and services, if only because pay increases are unlikely so long as there is a glut of unemployed workers.

This is “inflation” at its core: the spending value of your income and savings being intentionally devalued, so that the massive debt that governments in particular have taken on board to ‘save’ us from the pandemic (and the previous Great Recession).

From a mortgage perspective, there doesn’t seem to be much point in moaning about how much more expensive our variable rates are here – see Darragh Cassidy’s explanation above. It is what it is.

I think a far more interesting statistic is the fixed rate one, both here and in the EU. The majority of Irish mortgages - €616 million worth versus €132 million - was agreed in new fixed rate mortgages, and €132 million in variable rate mortgages in October. Fixed rate mortgages accounted for 79% of all new agreements, nearly as high as in the EU (84%) but not at the 10-year duration, which is commonplace there.

What Irish borrowers (who are pretty certain about their job security) really need to convince the government and lenders in this uncertain mad-money world, is that they really need access to low cost, (2.5%-3%) long term fixed rate loans.

Paying off a €250k, 30-year loan even at a 2.75% 10-year fixed rate (an average five year Irish fixed rate, incidentally) will cost c€1,020 per month.

If past inflation experience is anything to go by, in 10 years time that same c€1,020 payment will be the best contract you ever signed.