Ciarán Hancock: Credit union mortgage plan just an election soundbite

On Monday, Fianna Fáil made its election pitch to Irish mortgage holders, outlining nine things it would do in Government to stimulate activity and ensure fairness for borrowers.

The first bullet point in the executive summary of its finance spokesman Michael McGrath was to “end the scandal of the variable interest rate rip-off”.

The final one was to “empower credit unions to offer mortgages”.

Fianna Fáil’s thesis is that about 300,000 households on standard variable rates (SVRs) are being charged rates more than 2 per cent higher than the euro area average, at a time with the ECB’s official rate is close to zero.

“State owned banks are still charging variable rates of 4.3 per cent for borrowers above 90 per cent loan to value,” he said. “In effect, banks have openly defied the widespread public concern on the issue.”

And Bank of Ireland’s latest fixed-rate cuts of up to 0.35 per cent won’t have cut much ice with McGrath. “By taking a fixed rate, customers are not able to benefit from future rate reductions or lower rates from new market entrants,” his paper states.

The banks will argue that their cost of funds extends beyond the ECB’s headline rate, to include operational costs, achieving a commercial return on capital for shareholders and the cost of credit on defaulted loans. There is also the cost of loss-making tracker mortgages, which were heavily marketed in the boom and are now a big drag on profits for the Irish banks.

McGrath’s solution is for Ireland to “press the case for a long-term funding arrangement for tracker mortgages backed by the ECB to our European partners”.

If Ireland was ever going to get a solution to the tracker mortgage problem, it would have happened by now. The ECB wasn’t minded to give us one when we were knee-deep in recession and being the fastest-growing economy in the EU doesn’t exactly help our case.

But McGrath is right to bang the mortgage rate drum. In Northern Ireland, the standard variable rate for an Ulster Bank customer is 4 per cent. South of the border its rate is 4.3 per cent. Ulster Bank's three-year fixed rates start at 1.93 per cent in the North. In the Republic, it's 3.3 per cent.

Different costs

At

Bank of Ireland

, the cheapest fixed rate on offer in the North is 1.49 per cent for a two-year term where the loan to value (LTV) ratio is less than 60 per cent.

In the Republic, the equivalent rate is 3.35 per cent. If you go up to an 80 per cent LTV, the lowest rate offered in the North is 1.95 per cent compared with 3.35 per cent here. At AIB, rates as low as 1.99 per cent are available from its First Trust subsidiary. The cheapest rate available in the Republic is 3.35 per cent.

The banks will all argue that different costs apply to doing business in the two jurisdictions but the differences can also be explained by there being more lenders in the North to stoke competition.

Fianna Fáil's solution is to introduce legislation to empower the Central Bank to influence SVRs under certain conditions. It sounds great but the reality is that the Central Bank doesn't want to go there.

Fianna Fáil also wants to “empower credit unions to offer mortgages” to provide competition to the banks.

McGrath said an additional €4 billion in lending could be opened up from credit unions that could facilitate some 20,000 new mortgages. Richard Boyd Barrett of People Before Profit has made similar noises.

In fact, credit unions are not prohibited from providing mortgages to members. Under regulations issued at the beginning of January, credit unions can lend up to 10 per cent of their loan book over 10 years, subject to a maximum maturity of 25 years.

In addition, credit unions can apply to the Central Bank for an extension to their longer-term lending limits.

The latest quarterly prudential return for the sector, showed total gross loans for the sector of €3.952 billion. Just €85 million or 2.2 per cent of this was for loans of 10 years or more. So there is either little demand for such loans or no appetite among the credit unions to approve such lending.

The credit union movement in Ireland remains in a phase of restructuring following the financial crash. Last year, the sector moved from 383 to 335 active credit unions, under the auspices of its restructuring board, ReBo.

Suggesting that credit unions be allowed to offer mortgages makes for a great election soundbite but the sector is still some time off from having either the skills, financial resources or infrastructure in place to make it a reality.

Twitter: @CiaranHancock1