Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Are tracker mortgages haunting Ireland’s mortgage market?

Why are mortgage interest rates in Ireland so high compared to other countries? The ECB collects information on the average interest rate of a new mortgage for all euro countries and, for December 2016, the average for the euro area was less than 1.8%. In France, it was 1.5% and in Finland it was just 1.1%. In Ireland, however, it was 3.2%, the most expensive of the 19 countries covered, quite a bit above the next most expensive countries, Cyprus (3%) and Greece (2.9%).

At one level, this seems to be nit-picking. Compared to the bad old days like the early 1980s, when mortgage interest rates were almost 20%, is there that much of a difference between 3.2% and 1.2%? Perhaps more importantly, is an average of less than 2% sustainable? If growth were to pick up in Europe – as has been happening over the last year or so – then the pressure would be on for the ECB to normalise its own rates, with knock-on effects in markets such as Finland and France.

Nonetheless, the “Programme for a Partnership Government” last May included a commitment to examine the structure of the market for mortgages in Ireland and see if there were policy options available to bring the cost of mortgages down. This week, the Competition & Consumer Protection Commission – the amalgam of the Competition Authority and the National Consumer Agency – launched a consultation on this topic, as its analysis starts. I have no doubt that there are many issues which will affect the cost of mortgage credit at the margin. This includes Ireland’s small market size, which may deter international banks from entering. This may also include regulations, which – for example – prevent credit unions from lending more than a certain fraction of their capital for more than ten years.

However, I suspect that deep down, the problem lies with the legacy of the bubble and, going deeper, Ireland’s predilection for variable, rather than fixed, rate mortgages. To explain, it wasn’t always the case that Ireland was an expensive place to borrow. The ECB figures go back to 2003 and for much of 2003, 2004 and 2005, Ireland was one of the cheapest places to borrow. And therein may lie the rub.

Ireland’s mortgage market is skewed towards variable rate mortgages and in the bubble, these were trackers. Irish banks fixed the margin that borrowers would pay above the ECB rate, for the lifetime of the mortgage. They then gambled – in spectacularly unsuccessful fashion – that they would be able to roll over their own debt at a cost close to the ECB rate. Of course, when the so-called “Great Moderation” came to an end, and the “Great Recession” started, Irish banks suddenly found that borrowing short to lend long was a recipe for wipe-out.

But the trackers that helped to destroy them still exist. So, with ECB rates currently at 0% (yes, zero!), there are plenty of Irish households who borrowed in the bubble who are paying 1% or less interest. Irish banks, however, struggle to borrow themselves at such low rates and cover costs associated with being a financial intermediary. And if their own lenders aren’t subsidising legacy trackers, there is only one other group that could: new borrowers. The reason Irish borrowing is expensive now is precisely because it was so cheap ten years ago.

Rolling the clock forward, bubble-era trackers will continue to exist right through the 2020s and into the 2030s. Bizarrely, an ECB president in 2035 will still be able to financially affect Irish households for decisions they made in 2005. A PhD in Economics is not required to see that this is hardly ideal.

In most other high-income countries, the typical mortgage product is a fixed rate mortgage. In Denmark, for example, Danish banks are required to borrow for as long as they lend. This turns them into warehouses, breaking up the journey from international capital markets to the individual borrower. Households borrow for rates that are fixed for the term. The best banks are those than can add on the slimmest margins.

This is hopefully where the CCPC’s study will take it. A good rule of thumb is that when Ireland sticks out in a graph, find out if it’s a good thing or a bad thing and then find out why. The answer might not be popular or a simple fix. But it’s better to be right than to make things worse by applying a quick fix.


This is a version of a piece that originally appeared in the Sunday Independent.

Leave a comment