Irish Life & Permanent (IL&P) has agreed to participate in a new pan-European mortgage system which could allow consumers to avail of fixed rate mortgages without redemption penalties. Emmet Oliver reports.

Several large European lenders, including IL&P, have come together to form a new European financial grouping - the European Mortgage Finance Agency (EMFA).

The group said its aim was to revolutionise the way mortgages were funded in Europe and to give consumers a better deal. However, approval from the EU is needed before the system can operate commercially.

The EMFA idea is sponsored by Credit Agricole, France's largest mortgage lender, BBVA, Spain's largest mortgage lender,Northern Rock in the UK and BCP in Portugal. A range of other European financial institutions are considering the EMFA proposal.

The project would involve a unified secondary mortgage market across the EU allowing lenders in each country to access the same funding source on the same terms.

The agency said it could give consumers a better deal by allowing the introduction of long-term fixed rate loans without redemption penalties across Europe.

A statement from the group said it would be taking nothing away from existing arrangements but offering lenders "another funding option".

EMFA said it would operate in a similar fashion to Fannie Mae in the US. It said the US and countries like Japan, Malaysia and Korea had entities, known as government sponsored enterprises, to ensure stable long-term funding sources existed for mortgages.

They did this by creating a unified, liquid secondary mortgage markets.

These were markets that allowed investors to fund mortgages directly rather than through banks' balance sheets.

EMFA would have no direct contact with the mortgage consumer.

Instead the system would involve lenders selecting pools of mortgage loans, packaging them together and selling them to investors as mortgage-backed securities (MBS).