Research shows strong support for tougher stance on those in mortgage arrears

The subject of mortgage rates is never far from the headlines in Ireland. 

As you’re probably aware, Ireland has among the highest mortgage rates in the eurozone and has done for years.

According to the Central Bank, the average interest rate on a new mortgage in Ireland is currently 2.79%. Although this might seem low by historical standards, it compares to an average rate of just 1.27% in the eurozone and a rate as low as 0.67% in Finland. 

This means a first-time buyer who takes out a mortgage of €250,000, which is being repaid over 30 years, is paying €1,026 a month in Ireland compared to a eurozone average of €835 and a repayment of just €767 a month in Finland.

That’s a big difference. 

There are various reasons why rates here are so high. A lack of competition is one of them of course. But the riskier nature of lending in Ireland also plays a part...

Although mortgage lending is supposed to be secured, lenders here often have difficulties enforcing security and taking back ownership of a property in cases where a mortgage isn’t being repaid. 

This was highlighted in a recent study commissioned by the Banking and Payments Federation Ireland (BPFI) which showed that in cases where banks seek court action to repossess a home, they are only successful 11% of the time on average in Ireland, compared to 46% in the EU as a whole and over 80% in the Netherlands, Luxembourg and Denmark - all countries which have far lower rates than we do.

In addition, the court process takes longer here: 3.7 years against 3.1 years on average in the EU, and less than one year in Denmark and the Netherlands. 

Banks claim this all makes lending here more risky which forces them by regulators to have to hold more capital in reserve. This in turn then reduces the amount they can lend, reduces their profitability and ultimately impacts on their capacity to lower rates.

However according to new research carried out by us in conjunction with RED C, the public says it is strongly in favour of a tougher stance being taken by banks and the courts on those heavily in arrears if it would lead to lower mortgage rates. 

Research

The research, which surveyed a nationally representative sample of just over 1,000 adults (+18) in the Republic of Ireland during March, shows that 45% of people say they are strongly in favour of a tougher stance being taken on borrowers who are in arrears if it led to lower mortgage rates. A further 25% say they are somewhat in favour.

This compares to 23% who are strongly against. Just 7% said they were unsure.

The research was carried out before KBC made the shock announcement that it too was considering exiting the Irish market, citing the ‘challenging’ nature of doing business here. 

Men, younger people, higher social groups and Dublin residents are much more likely to favour easier repossession in return for lower mortgage rates according to the research. While those in rural areas and who are over the age of 65 are less likely to favour it.

Risky lending 

While there are several reasons why mortgage rates in Ireland are above the eurozone average, the exit of both Ulster Bank and KBC seems to lay waste to the narrative that we’re all being ripped off and that banks here are raking in profits. If that were the case, more banks would want to do business here surely?

It does appear that lending in Ireland is risky and a big reason for that risk is that when someone in Ireland decides not to repay their mortgage, for whatever reason, the court system makes it hugely expensive and time consuming for lenders to recover the asset against which the loan was issued. 

This is borne out by the latest data from the Central Bank which shows that 10,789 mortgages in Ireland are currently in arrears by between five and 10 years while an additional 5,266 are in arrears for more than a decade. 

It has been argued that there are too many cultural and political impediments to banks enforcing security. And it never makes a good news story. However our research shows that there is in fact appetite among the public for the courts and banks to be tougher on those who are not willing to repay if it means other mortgage holders can enjoy lower rates.  

Of course few people would want to see a system where banks act aggressively against people who get into short-term financial difficulty and a home repossession should only be carried out as a last resort. But it seems that the current system isn’t working and is contributing to many homeowners having to pay thousands of extra euro in interest each year. 

It should surely be possible to find a better balance between the need for housing protections but also the need for lenders to be able to deal appropriately with those who can no longer or are unwilling to repay their mortgage?

How does Ireland compare to the rest of Europe in terms of interest rate and enforcement success?

*Source: CBI and ECB. Average interest rate issued on a new mortgage in February 2021.

**Average recovery rate at the end of the judicial process. Source: BPFI and Martello Strategic Consulting.  

***Denmark is a non-eurozone country. Average rate not available. Based on a 0% 20-year fixed loan from Nordea. In reality Danish customers will also be charged initial and ongoing admin fees meaning the monthly rate may be slightly higher.

What do you think?

What are your thoughts on the research? Do you agree that we need to be tougher on those in arrears? Or are you comfortable accepting higher mortgage rates if it means more people can remain in their home?

Get in touch by leaving a comment below.