Options for Ireland’s mortgage market
Government request
In May 2016, the Government published its “Programme for a Partnership Government,” which stated that the Government would request the Competition and Consumer Protection Commission (CCPC) to work with the Central Bank of Ireland (CBI) to set out the options for the Government in terms of market structure, legislation and regulation to lower the cost of secured mortgage lending and improve the degree of competition and consumer protection.
The Minister for Finance, Michael Noonan, TD, wrote to the Minister for Jobs Enterprise and Innovation (DJEI), Mary Mitchell O’Connor, TD, on the 25th October 2016 requesting that the CCPC set out options in respect of mortgage lending as described in the programme for Government. This paper fulfils the request made of the CCPC. To progress the options proposed, further consideration and study is required.
The Paper was researched and developed by the CCPC, and the options developed in it reflect its views alone. The CCPC worked closely with the CBI, with the CBI giving of its time, expertise, and market data.
Scope
For the purpose of this study, the CCPC focused on mortgages secured on a property, which includes Principal Dwelling Homes (PDH) and Buy to Lets (BTL) giving consideration to the following:
- What consumers want and expect in a properly functioning mortgage market;
- Describing the unique characteristics of the Irish mortgage market, identifying gaps where competition or consumer protection is inadequate and surveying the views of stakeholders and potential new entrants on barriers to entry into the Irish mortgage market;
- Identifying how mortgage interest rates are determined in the Irish market, the role that competition between lenders plays in that process and comparisons with other jurisdictions;
- Setting out a range of options to improve competition and consumer protection in the mortgage market which may lead to a reduction in the cost of secured mortgage lending.
Methodology
In developing this options paper, the CCPC has undertaken a multi-faceted approach. It conducted an extensive series of detailed interviews with stakeholders including consumer representatives, industry representatives, individual banks and mortgage lenders both domestic and in other jurisdictions, independent financial advisers, new entrants and potential new entrants to the Irish market, academics, the ESRI and regulatory bodies, both domestic and foreign.
To better understand the perspectives of consumers, the CCPC commissioned Amárach Research to undertake a series of focus groups to examine their perceptions of the mortgage market, how it operates and their views on switching mortgage products. You can download the report here. In addition, the CCPC utilised the market intelligence it receives from its consumer helpline.
The CCPC also issued a public consultation on 20 February and received 20 responses to this consultation.
The main options presented
A national strategy and vision
- The development of a suitable national forum that would develop a defined long-term strategy for both the housing and mortgage markets. This strategy would set the context for all future policy choices that influence both demand and supply in the market and give the context in which the CBI can make effective regulatory decisions.
Consumer choice
- Lenders are competing on auxiliary items and mortgage add-ons rather than rates. This can have the ability to mislead consumers in their choices, and result in consumers drawing down on a mortgage product which may not be best suited to their needs or financial circumstances. A joint working group between the CBI and the CCPC should examine the appropriateness of these offers and develop a set of policy recommendations for implementation.
- Switching is a clear way to unlock greater competition in the market. There is considerable work to be done to improving the ability for, and incidence of, switching. To address this the CCPC proposes that they work with the Legal Services Regulatory Authority to facilitate the introduction of e-conveyancing.
- The Department of Finance and the CBI with the CCPC should establish a working group to facilitate the development of automated switching processes, including legislative changes where appropriate.
Encouraging new entrants & building international reputation
- To address the high concentration of a small number of lenders and low levels of new entrants the Department of Finance and the CBI should consider “business-friendly” initiatives. In the UK such measures have included a start-up unit in the Financial Conduct Authority and an Innovation Hub.
- To encourage new entrants, innovation and build Ireland’s reputation internationally consideration should be given by the Department of Finance and the Department of Jobs, Enterprise & Innovation to undertake an international campaign similar to those run in the private sector, when firms are seeking additional equity or pursuing mergers and acquisitions. Such a campaign would highlight the attractiveness of the Irish mortgage market for lenders and detail the policies being pursued to ensure the market offers robust and predictable outcomes for lenders.
Policy and longer term considerations
- The CCPC questions whether short-term funding of mortgage loans and the use of deposit funding is the optimum funding model for Ireland’s mortgage market. Due to the financial risks attached to short-term lending models, the Department of Finance and the CBI should look at how to promote longer term funding options. A shift towards longer-term fixed rates could bring several benefits, notably increased transparency and stability for borrowers and more reliable, stable funding sources for lenders.
In the course of researching this paper the CCPC found that there was a lack of predictable and consistent practices when dealing with loans in arrears. The impact of this is that banks are required to have more capital to write a mortgage which means loans are more costly. The CCPC considers that any changes to repossession policy should be carefully considered and asks that the establishment of an interdepartmental working group or Joint Oireachtas Committee should be considered.
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