Long Term Fixed Interest Mortgages Should be the Norm in New Mortgage Market – Hayes

Speaking at the annual Banking & Payments Federation Ireland National Conference, Dublin MEP and ECON Committee Member, Brian Hayes, called on banks to lead a decisive shift in the provision of new mortgage finance.

“That shift should be in favour of ten year or longer fixed interest mortgages being the norm for residential mortgages.

Experience should inform us that variable interest rate mortgages are a huge risk to customers. Even though tracker mortgages have proved hugely beneficial to borrowers they are no longer available to customers and of course these mortgages continue to cause losses for mortgage providers. Mortgage holders on variable mortgages are being fleeced by the banks to make up for the losses on tracker mortgages. This is obviously unfair.

With long term international interest rates at an all-time low, there is now a clear opportunity for mortgage providers to borrow long term and provide 10 year fixed interest mortgages at less than 3.5%.

Making long term fixed interest mortgages the norm in the industry would introduce a major element of stability into the market. It would be good for mortgages holders, providing them with certainty as regards payments. It would also be in the long term interest of mortgage providers introducing a strong element of stability onto their balance sheets.

Bank lending and crazy borrowing were central to Ireland’s economic and financial crisis. Heavy losses in commercial and residential property lending collapsed the Irish banking system and at one point endangered the entire euro system.

The failure to have proper lending policy by the banks was at the root cause of the financial crisis, which also enveloped much of Europe and the US. A major programme of banking reform has been underway in the European Union in recent years. Part of the process has been the European wide bank stress test, the results of which were published in recent weeks.  Another element is the Single Supervisory Mechanism (SSM) the head of which is Daniele Nouy – who was before the European Parliament last week.

I have to say that Ms Nouy strikes me as the type of person who knows the difference between liquidity and solvency when it comes to banks. It’s a pity she wasn’t around the Irish banks some years back.

I had the chance of questioning Ms Nouy on the proposal by the Irish Central Bank, to require mortgage borrowers to front up a deposit of 20%. She broadly supported the proposal. I have to say that I’m not convinced and have real fears that this requirement will make a bad situation worse in the housing market. She clearly recognised that the scale of the banking collapse was greater in countries that went through deeper economic shocks. It’s not unreasonable to say that the housing market is dysfunctional in a circumstance where new homes built and new lending is non-existent over the last seven years.

During the bubble years many Irish mortgage providers were giving out 100% plus mortgages. This of course was crazy and the Irish regulator failed to rein in the banks. However I think a 20% deposit requirement is going from one extreme to the other extreme. Before the bubble the traditional deposit requirement was 10%. I am particularly concerned about the impact a 20% deposit requirement will have on first time buyers in the Dublin area. It will act as a bar on new lending which needs to happen if the recovery is sustained. Remember the commitment of the pillar banks to hit their target of new lending on all fronts? Hard to see at happening if the 20% deposit rule is enforced.

According to the September Housing Index CSO figures the average cost of a home in Dublin is €349,000. A 20% deposit is €70,000. It is extremely difficult for a single person or a young couple to save that amount of money, particularly if they are already paying high rents. And as everyone knows there are also considerable transaction costs when buying a house.

A reasonable deposit is a sensible requirement. Capacity to pay is also critical. This is related to income levels, savings records, current rent payments, size of mortgage, length of mortgage, interest rates etc.  In the past a simple rule of thumb was applied by mortgage providers. If the mortgage repayments exceeded 35% of disposable income that was a clear warning sign. This sounds like a good yardstick to apply to individual cases.

I welcome the recent remarks of Patrick Honohan. Clearly the governor is looking at all of the consequences for borrowers and for the economy in devising a prudent approach to mortgage lending.

It’s in everyone’s interest that we have a functioning and prudential housing market. Yes we must recognise the appalling mistakes of the past and demand that everyone remains cautious in responding to the new economic reality. For people buying a second home or for people buying to let, a 20% deposit is reasonable. It is neither fair nor reasonable however to require first time buyers to come up with such a large deposit.

I think a single one size fits all approach does not take into account the complexity of the housing market. The most careful consideration must be given to the particular needs of first time buyers.  And on that question, as some have asked, why grubby politicians like me, should have the temerity to question central bankers and supervisors? If we have learnt anything from this crisis – it must surely be- that no one is infallible. If we cannot learn that, we have learnt nothing.”

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