Why do Irish mortgage holders pay more than borrowers in other EU countries?

Welcome to our new weekly personal finance newsletter On the Money, where we will delve into personal finance issues and how they might affect your pocket. This newsletter, compiled by our personal finance writers, including Dominic Coyle and Conor Pope, will be issued each Friday to subscribers.

So let’s get started. There was an element of “it hasn’t gone away, you know” about a Central Bank report this week on mortgage arrears. The study showed that as many as 25,000 mortgage-holders are still in long-term arrears.

It comes as Bank of Ireland became the latest lender to raise its interest rates after three separate hikes over recent months by the European Central Bank (ECB) – a move likely only to increase the pressure on affordability for hard-pressed borrowers.

However, the bank will increase its fixed mortgage rates by one-quarter of a percentage point and only for new customers. The most recent ECB hike was three-quarters of a percentage point, so the bank is not passing it all on. And anyone already on the bank’s books as a home loan customer will be able to secure the lower rates in effect before the announcement.

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The noticeable reluctance of Irish bank lenders to mirror the significant increases in ECB rates – which have now jumped by two percentage points since July – points to an increasingly intense battle for mortgage market share among the three remaining banks in the Republic, not least as the funding arrangements of non-bank lenders makes them less competitive. Indeed, PTSB has not raised rates yet, the only mortgage lender active in the Irish market yet to do so. Tracker mortgage holders aside, of course.

But even with that, Irish residents still pay more than our European cousins for home loans and a large part of the reason for that takes us back to that Central Bank report.

About 15,000 of the mortgage-holders in long-term arrears have not paid a penny off their loans in over two years. Not one cent.

There are without doubt hard cases among this group – people who have lost their jobs or their health in recent years. But it is hard to believe there are 15,000 borrowers who have not been able to find a single euro in two years to try to meet their housing costs.

These are not pandemic-related problems. Most of these loans are in default for more than five years and each owes, on average, more than €240,000.

That is €3.6 billion in unserviced lending. And it is every other borrower who is paying the price.

This scale of defaulting on credit and the acknowledged reluctance of Irish courts to allow foreclosures, giving banks access to the security against which they lent in the first place, means the ECB insists on Irish banks having greater reserves on their books.

This “dead money”, as banks see it, means they charge us more on the smaller amount of assets that they can lend out. It also reduces the prospect of competition as outside lenders will think twice about coming into a market where they cannot be comfortable about accessing the assets put up as security for a loan if things go wrong.

As a State, we have a simple choice. We either accept we will pay a premium when we borrow to cover those who cannot or will not pay back their loans; we make it easier for banks to foreclose on loans that fall unsustainably deep into arrears, or the State itself accepts it will have to act as underwriter for loans where the alternative is repossession.

At the very least, we should have an honest discussion about it.

Tier pressure

Speaking of daft ideas, the notion raised this week of tiered welfare payments – where those who earned more, and who therefore paid more in PRSI, before losing their jobs would get a higher jobseeker’s payment – has to rank right up there.

Reference was made to the banded approach under the pandemic unemployment payment (PUP), but this misses the fact that the PUP was always an exceptional and temporary arrangement to support a group, most of whom were expected to be back in their jobs once the crisis and the associated lockdowns of the economy lifted. And so it has proved.

To now consider institutionalising such an arrangement seems to be putting in place an almost Animal Farm-esque approach to welfare, with some more equal than others. The nature of welfare payments has always been that they are social – ie you do not get out what you pay in but rather you pay in for the greater good so that those in need are provided for, albeit at a subsistence level.

And even at a pragmatic political level, it is difficult to see how such a move does anything other than open the door for the Opposition.

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