ECONOMICS:Irish mortgage borrowers continue to benefit from incredibly low interest rates, writes PAT McARDLE

THE TRADITION of home ownership in Ireland is strong, and successive governments facilitated it in a variety of ways, not least via mortgage interest tax relief.

The extent of this was such that a few years ago the OECD concluded that we had one of the most tax-friendly housing environments in the world. It was not meant as a compliment.

The special treatment of mortgage borrowers extended to the regulatory sphere.

When the financial regulator was set up, a specific post of director of consumer affairs was established. Banks had to get the director’s approval for increases in fees and charges, a practice that existed in only one other country, somewhere in Africa.

In addition, there was a succession of new entrants into the mortgage market, with banks from Britain, Denmark and the Netherlands all appearing during the Noughties.

Competition became intense with up to a dozen active retail lenders, a bloated broker sector which promoted switching from one lender to another and Irish mortgage rates that were among the lowest in the euro zone.

In short, the dice were loaded in favour of the borrower.

The introduction of 100 per cent mortgages and tracker mortgages at spreads over ECB rates that were clearly loss-making became the norm. The equivalent would be for retailers to treat all food sales as loss leaders and, moreover, to enter into contracts to continue the practice for the life of a typical mortgage, frequently 30 to 40 years.

Now the banks are stuck with these contracts in the same way that tenants are bound by upward-only rent reviews.

Presumably Central Bank governor Patrick Honohan’s report on banking will tell us how this was justified by the banks and why the prudential side of the regulator, a poor cousin of the consumer side with no director at board level, accepted it.

The favourable treatment for borrowers continued after the crisis broke.

The ECB responded to the emergency by reducing its key interest rate by 3.25 percentage points; the Irish banks covered by the guarantee lowered their standard variable rates by an identical amount, with the active encouragement of Government it would appear. In so doing they copper-fastened a loss-making situation.

Ulster Bank and ACC, by contrast, took a more hard-nosed approach and restricted their cuts to 2.25 percentage points. Subsequently, some of the covered banks have had to reverse tack, with more likely to follow.

On the whole, however, Irish mortgage borrowers still benefit from incredibly low interest rates.

The portion of the 1.9 million people still in employment who are mortgage holders has benefited enormously from the fall in interest rates. Affordability, as measured by the proportion of after-tax income required to service an average mortgage, is now back to levels last seen in the mid-1990s, enabling them to pay down debt and/or increase savings.

Those who have suffered severe income reduction or are no longer employed are in a much more difficult position.

According to the financial regulator, there are almost 800,000 mortgage loan accounts of which 28,600 or 3.6 per cent are in arrears for more than 90 days. However, unlike Britain or the US, the escalation in arrears has not, so far, led to widespread repossessions.

Instead, the Code of Conduct for Mortgage Arrears, which traditionally stayed lenders from initiating legal action for six months, has been extended to 12 months. However, this merely postpones the problem, which is set to get worse over the next year.

Recently the Government announced the establishment of an expert group to examine the matter. Its terms of reference are based on the Renewed Programme for Government and include legal reform plus an examination of measures to assist those in mortgage arrears “with reference to the measures adopted in other jurisdictions”.

The programme has examples of what might be considered, including:

• reduced rates;
• longer maturity dates;
• rolling-up of outstanding interest;
• lenders taking equity in the house;
• lenders taking ownership and leasing back the property to the resident, with rent payments coming off the loan.

It remains to be seen to what extent these will figure in the recommendations.

Meanwhile, it is illuminating to look at the experience abroad.

There is a variety of approaches from country to country. Banks offer repayment holidays of up to six months, reduced repayments, interest-only loans and, in some cases, job-seeker support or even shared equity. The Government programme, in effect, lists the measures found elsewhere. The problem is who will pay for them.

Britain has schemes to assist financially those at risk of repossession but they are typically of short duration. It also has a deferred mortgage scheme which lasts for two years, following which interest is rolled up and new repayment terms agreed. If the borrower defaults, the government recompenses the bank for 80 per cent of the interest due.

In Spain, the unemployed can defer half their monthly mortgage payments for up to two years and still claim tax relief on the full amount.

The US and Britain also attempt to avoid repossessions by allowing borrowers to rent back their homes in certain circumstances.

There are many approaches but no easy answers. In the end the cost of assisting distressed mortgage holders is usually shared between the taxpayer and the banks.

We are unlikely to be any different.