Mortgage payments from many borrowers in Continental Europe will soon be cut following Thursday's decision by the European Central Bank (ECB) to reduce lending rates. Homeowners here will not benefit because the Bank of England remains reluctant to cut rates further. But a growing number of UK buyers will be affected by the ECB's decision because they have taken out mortgages abroad. A few want to benefit from the lower interest rates on the Continent and the strength of sterling against the euro. But most are buying second homes for holidays or retirement.
Simon Conn, a partner at Conti Financial Services, who arranges loans overseas for UK borrowers, reports a big increase in foreign mortgages. UK borrowers who venture outside their home market quickly realise that mortgage traditions and loan rates differ markedly between countries. There is no integrated market for mortgages, even after 10 years of the European single market. A more integrated market could bring big savings. The European Commission has estimated that a single market for home loans could lead to savings of 0.14 per cent of the EU's gross domestic product, which totals about {XEU}9,000bn (£5,760bn).
The mortgage market is huge, and a home loan is the biggest debt most people will ever shoulder. The value of home loans across the EU has increased by 8 per cent every year since 1990 and now stands at {XEU}3,900bn. A recent study for the European Financial Services Round Table, a business think tank, found that a more competitive, integrated mortgage market could save Italian borrowers {XEU}2,550 a year on a typical {XEU}100,000 mortgage loan. Spanish borrowers would save {XEU}1,690 a year and Irish ones {XEU}790.
This is because some national banks are quicker than others at passing on interest rate cuts to mortgage borrowers. Lenders in the Netherlands and Germany are quickest, with both passing on almost the full rate cut within three months. The UK is in the middle of the range with the Ireland and Italy, while French customers generally have to wait much longer than three months. A more integrated market would put pressure on lenders with high rates to react more quickly. A single market for home loans could also help increase the mobility of the European workforce. But national barriers persist, some dressed up as consumer protection. But there are also varying levels of stamp duty, as well as different foreclosure procedures and treatments of collateral.
Many mortgage banks believe national markets work efficiently and that there is no need for further initiatives to open up lending across borders. The European Mortgage Federation says the difference in loan prices is related to differences in national regulations. Last year, banks and the Commission agreed to introduce a code of conduct which involves issuing a standard information sheet to customers across the EU so that they can compare loans more easily. However, some lenders protest that the information often comes too late in the process for customers to shop around.
So far, cross-border loans have been confined to a small elite of well-heeled clients buying second homes in the sun and mobile expatriates. However, even these have found difficulties taking advantage of a single market. For example, a UK businessman who has lived in Belgium for 20 years and owns a home in Brussels tried to take out a mortgage to buy his daughter a house in this country to occupy while at university. He could not get a loan from a Belgian lender because the collateral would not be in Belgium, while few UK banks were prepared to advance anything because he was not earning in the UK. He eventually found a loan through a broker, but could not take advantage of many of the attractive rates available.
Such cultural obstacles often stand in the way of integration. "A lot of the overseas lenders have withdrawn from Ireland because it can take two years to get a court repossession notice," says Des Byrne, retired director-general of the Irish Mortgages and Savings Association. "In some of the Scandinavian countries this only takes 10 days." Others blame consumers for not looking beyond the price of a mortgage. "We tried to sell French mortgage protection in the German border market, but it was a total fiasco," says Alain Gourio, legal director for UCB, an arm of French bank, Paribas. "French rates are considerably higher and German consumers didn't hesitate to go for a lower price regardless of any protection they would receive."
French law sets a ceiling on the level of penalty that can be imposed on a consumer for repaying a loan early. Early redemption penalties in France are restricted to 3 per cent of the remaining capital left to pay. However, German consumers are used to cut-throat competition on their domestic market and were attracted more by low loan rates than by the ability to repay quickly. Paribas' experience highlights the patchwork of traditions that complicate the creation of a single market. Another example is the French ban on flexible loans such as offset mortgages that are becoming more popular in Britain. These do not count as a mortgage in EU legislation because they can be used for other purposes such as home improvements.
Another big drawback to more integration is the wide differential in stamp duty, which ranges from 13 per cent in Greece to 2 per cent in the UK. Other associated costs such as lawyers' fees can also differ greatly between countries. But even these obstacles should not be insurmountable. Louis Hagen of the German mortgage banks association says German banks do almost half of their lending in commercial mortgages outside their own country. "There is demand out there for other products and I think there would also be demand in the housing market," he adds.
Mortgage lenders in many EU countries find it hard to break into local markets overseas and the traditional route to cross-border lending has been to buy a local distributor. Even the internet has not led to greater integration of financing. Many homebuyers use it to look for property, but remain reluctant to secure a loan online. The Commission recently threw down the gauntlet to mortgage banks, inviting them to form a working group to identify remaining obstacles to integration. "We will have to roll up our sleeves and take a close look at the whole regulatory environment," Jean-Claude Thebault, a Commission official, told a conference of mortgage lenders. Homebuyers may nonetheless have to wait some time for the benefits of a more competitive market.
Simon Conn, a partner at Conti Financial Services, who arranges loans overseas for UK borrowers, reports a big increase in foreign mortgages. UK borrowers who venture outside their home market quickly realise that mortgage traditions and loan rates differ markedly between countries. There is no integrated market for mortgages, even after 10 years of the European single market. A more integrated market could bring big savings. The European Commission has estimated that a single market for home loans could lead to savings of 0.14 per cent of the EU's gross domestic product, which totals about {XEU}9,000bn (£5,760bn).
The mortgage market is huge, and a home loan is the biggest debt most people will ever shoulder. The value of home loans across the EU has increased by 8 per cent every year since 1990 and now stands at {XEU}3,900bn. A recent study for the European Financial Services Round Table, a business think tank, found that a more competitive, integrated mortgage market could save Italian borrowers {XEU}2,550 a year on a typical {XEU}100,000 mortgage loan. Spanish borrowers would save {XEU}1,690 a year and Irish ones {XEU}790.
This is because some national banks are quicker than others at passing on interest rate cuts to mortgage borrowers. Lenders in the Netherlands and Germany are quickest, with both passing on almost the full rate cut within three months. The UK is in the middle of the range with the Ireland and Italy, while French customers generally have to wait much longer than three months. A more integrated market would put pressure on lenders with high rates to react more quickly. A single market for home loans could also help increase the mobility of the European workforce. But national barriers persist, some dressed up as consumer protection. But there are also varying levels of stamp duty, as well as different foreclosure procedures and treatments of collateral.
Many mortgage banks believe national markets work efficiently and that there is no need for further initiatives to open up lending across borders. The European Mortgage Federation says the difference in loan prices is related to differences in national regulations. Last year, banks and the Commission agreed to introduce a code of conduct which involves issuing a standard information sheet to customers across the EU so that they can compare loans more easily. However, some lenders protest that the information often comes too late in the process for customers to shop around.
So far, cross-border loans have been confined to a small elite of well-heeled clients buying second homes in the sun and mobile expatriates. However, even these have found difficulties taking advantage of a single market. For example, a UK businessman who has lived in Belgium for 20 years and owns a home in Brussels tried to take out a mortgage to buy his daughter a house in this country to occupy while at university. He could not get a loan from a Belgian lender because the collateral would not be in Belgium, while few UK banks were prepared to advance anything because he was not earning in the UK. He eventually found a loan through a broker, but could not take advantage of many of the attractive rates available.
Such cultural obstacles often stand in the way of integration. "A lot of the overseas lenders have withdrawn from Ireland because it can take two years to get a court repossession notice," says Des Byrne, retired director-general of the Irish Mortgages and Savings Association. "In some of the Scandinavian countries this only takes 10 days." Others blame consumers for not looking beyond the price of a mortgage. "We tried to sell French mortgage protection in the German border market, but it was a total fiasco," says Alain Gourio, legal director for UCB, an arm of French bank, Paribas. "French rates are considerably higher and German consumers didn't hesitate to go for a lower price regardless of any protection they would receive."
French law sets a ceiling on the level of penalty that can be imposed on a consumer for repaying a loan early. Early redemption penalties in France are restricted to 3 per cent of the remaining capital left to pay. However, German consumers are used to cut-throat competition on their domestic market and were attracted more by low loan rates than by the ability to repay quickly. Paribas' experience highlights the patchwork of traditions that complicate the creation of a single market. Another example is the French ban on flexible loans such as offset mortgages that are becoming more popular in Britain. These do not count as a mortgage in EU legislation because they can be used for other purposes such as home improvements.
Another big drawback to more integration is the wide differential in stamp duty, which ranges from 13 per cent in Greece to 2 per cent in the UK. Other associated costs such as lawyers' fees can also differ greatly between countries. But even these obstacles should not be insurmountable. Louis Hagen of the German mortgage banks association says German banks do almost half of their lending in commercial mortgages outside their own country. "There is demand out there for other products and I think there would also be demand in the housing market," he adds.
Mortgage lenders in many EU countries find it hard to break into local markets overseas and the traditional route to cross-border lending has been to buy a local distributor. Even the internet has not led to greater integration of financing. Many homebuyers use it to look for property, but remain reluctant to secure a loan online. The Commission recently threw down the gauntlet to mortgage banks, inviting them to form a working group to identify remaining obstacles to integration. "We will have to roll up our sleeves and take a close look at the whole regulatory environment," Jean-Claude Thebault, a Commission official, told a conference of mortgage lenders. Homebuyers may nonetheless have to wait some time for the benefits of a more competitive market.
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