Consumers are likely to benefit from cheaper mortgages if foreign mortgage lenders decide to move into the highly-profitable Irish mortgage market. But recent events in Britain, where the mortgage industry is under investigation, show that cheap loans may come at a high price.

At present, several British and continental financial institutions are considering a move here. Bank of Scotland is in discussions with Irish regulatory authorities about selling mortgages by telephone and over the Internet. Two British mortgage lenders are holding talks with independent mortgage brokers about selling a range of products here. And KB Bank of Belgium, which owns Irish Intercontinental Bank and through it, Irish Life Homeloans, is expected to introduce new products based on long-term low European interest rates.

One of the main attractions of the Irish market for new entrants is the high profit margin that can be earned on mortgages. Currently, banks and building societies can borrow money at rates as low as 2.5 per cent while charging home owners an average variable interest rate of 5.25 per cent.

Margins are far lower in the highly-competitive British market where the Bank of England's base rate is 5 per cent and where the standard variable mortgage rate, according to the Council of Mortgage Lenders, was 6.43 per cent in April.

But there are other attractions too in the Irish market, says Mr Michael Dowling, managing director of Gunne Financial Services and president of the Irish Mortgage Advisers Federation (IMAF) which is in talks with two British lenders. "They can lend money cheaper. There is less risk to lending in Ireland compared with the UK. And there is a greater level of security for them here," he says.

As evidence, Mr Dowling points to the lower average loan to house value ratio which stands at 68 per cent in Ireland, but 80 per cent in Britain; the absence of negative equity in the Irish market, unlike Britain where 1.5 million people owe more than the value of their houses; and the conservative lending criteria in the Republic where the maximum loan is based on three times salary and an average of 90 per cent of the purchase price, compared with Britain where loans of four times salary and 110 per cent of the purchase price are not uncommon.

According to Ms Fionnuala Earley, senior economist with the Council of Mortgage Lenders, British lenders operate in a highly competitive market where, in addition to banks and building societies, non-traditional players such as insurance companies, supermarket banks and Virgin Financial Services all offer aggressively-priced mortgages. Bank of Ireland and First Active are also active in the British home mortgage market, she points out, through their respective subsidiaries, Bristol & West and Mortgage Trust.

"For anyone entering the European market, Ireland might be a good place to start," Ms Earley says. "It's certainly a healthy market. The British market has lots of players with threats of other players moving in. But the market isn't really doing very much. There are not really many people moving house or newly getting into the market."

To gain business, some British mortgage lenders are offering steeply discounted rates, some as low as 2-3 per cent below the standard variable rate for the first couple of years, she said.

If the British institutions that are holding talks with IMAF enter the Irish market, they are likely to offer mortgage rates at least half a per cent lower than what the Irish banks and building societies charge, Mr Dowling said. They will also target existing as opposed to new customers, he added.

In addition, they are likely to offer a range of products not available in the Republic. These could include home equity plans, interest rates that would stay within a certain percentage of the base rate, and loyalty schemes which would reward customers who stay with their lender for a set period of time.

A spokesperson for Bank of Scotland said it was too soon to say how any products it might sell in the Republic would be structured. The bank has a strong branch network in Scotland, but sells mortgages in England through its direct phone banking operation. Its standard variable rate for British mortgages is currently 6.69 per cent.

While there is no way of knowing at this stage what any lender coming into the Irish market might offer, the increased competition is bound to have an impact on the products offered by the Irish banks and building societies.

"To maintain market share, the Irish lenders will have to compete and that has to be positive at the end of the day for the consumer," Mr Dowling says.

The Consumers' Association of Ireland has welcomed the prospect of new players in the market.

"We welcome this development in that increased competition should translate to more choice and better value for consumers," said Mr Fergal Barry-Murphy, financial researcher at the association. "Mortgage rates in Ireland are very high when compared to other European countries. At the moment, banks are charging variable rates of over 5 per cent. This can be over twice the rates the banks themselves borrow at. It will certainly be good news for consumers if foreign banks can offer lower rates."

Irish banks and building societies say they too favour competition and the benefits it brings for consumers. But privately they remain sceptical about the long-term ability of any new lender to offer rates at significantly lower levels than what is currently available.

Mortgages are not funded solely on the basis of wholesale interbank rates but also by deposits, they say. At present, most banks and building societies offer rates on very large deposits that are above the wholesale rate of 2.5 per cent. But if the institutions have to offer lower rates to borrowers, they say the rates for savers will drop too.

In addition, they point out, British lenders offer deeply discounted initial rates, but the variable rates are far higher and home owners can be locked in for up to seven-eight years.

"While UK competition could put some pressure on interest rates, it's important to remember that UK lending institutions haven't covered themselves in glory in the way they look after customers' interests," says Mr Martin Walsh, general manager, head of lending at EBS. "Recent discussion in the UK and the review of UK mortgage lending currently under way is indicative of this."

Mr Des Byrne, director general of the Irish Mortgage and Savings Association, agrees. "The only way they'd get a share of the Irish market is by offering discounts. But, in the UK, discounts have not been popular. They're being hammered by regulators and the financial press."

The British Treasury last week launched an investigation of the mortgage industry in response to concerns expressed by the Office of Fair Trading and the Consumers' Association about extended lock-ins, tied insurance products and the failure of lenders to cut rates after base rates fall. The review will also consider whether regulation of mortgage lending should come under the auspices of the Financial Services Authority or remain under the existing voluntary code of practice.