homebuyers could be able to shop across Europe for the best mortgage deal, under plans being considered by the European Commission. Brussels is looking at whether a euro mortgage – a common mortgage deed – could be developed to get over legal barriers to cross-border home loans.
The euro mortgage could allow UK consumers to take advantage of cheaper mortgage rates on the continent. But doesn’t the UK market already serve borrowers well? Only 1 per cent of Europeans – mostly second homeowners or people living in border regions – take out a mortgage for a home from another European country. Language, legal barriers, fluctuating exchange rates and different rules on early repayment are all seen as significant barriers to a single mortgage market. The creation of a euro mortgage could help overcome some of these difficulties.
As the single European market becomes more integrated, there is increasing potential to seek mortgages from other countries in Europe. Increased competition and choice in the mortgage market could benefit consumers, provided there are proper safeguards including cross-border redress and enforcement co-operation.
At present many consumers are deterred from trying to shop cross-border for financial services by a lack of information, language problems, and the level of risk.
Major purchase
Buying a property is, for most people, the largest single purchase they will ever make and therefore the mortgage market is a key issue for consumers. The UK has the fourth largest owner-occupancy rates in the EU, and it has the second largest mortgage market in Europe after Germany.
Consumers are often unaware of their rights under their own national law, let alone those under the laws of other EU member states. In the desire to bring about a single market in mortgage credit, care must be taken not to undermine consumer protection and confidence in financial services.
While the UK remains outside the eurozone, the euro remains a foreign currency. UK consumers who take out mortgage loans in euros will continue to be vulnerable to exchange rate fluctuations. If the value of the pound falls against the euro, then the amount borrowed in euros and the cost of repayments will increase in pounds.
Integrated market
European directives have, over the last decade, attempted to create the platform and launch pad for an integrated European mortgage market. The implementation of these directives by the member states has been different depending on the state but, broadly speaking, there is now some unity in regulation and approach. The issue the UK mortgage market faces is that it is not currently part of the eurozone and, therefore, the majority of UK lenders do not offer the option of a euro mortgage. The central bank for the eurozone, the European Central Bank, has a track record of low interest rates and the likelihood is that it will continue to provide lower rates than in the UK.
In July 2005, the European Commission issued a Green Paper to consult on issues around integrating the EU mortgage credit market. It looked at pre-contractual information, advice provision, early repayment, annual percentage rate, enforcement and redress, as well as other non-consumer issues such as collateral, property valuation, and land registers. This is the latest stage in an ongoing Commission process to understand this area.
European Union mortgage markets represent an important part of the overall economy of EU member states. Increased efficiency and competitiveness in these markets has the potential to contribute to the overall growth of the EU economy by enabling consumers to enter housing markets, through helping homeowners take full advantage of the value of their housing assets and by facilitating labour market flexibility.
As the European Commission’s Green Paper makes clear, increased efficiency and competitiveness in EU mortgage credit markets is most likely to be delivered by ensuring that mortgage credit can be demanded and offered with limited difficulty throughout the EU, and that market completeness, product diversity, and price convergence are improved across member states.
Funding costs
While mortgage credit markets in the EU are at present very restricted, the wholesale markets that increasingly provide the funds for EU mortgage lending are international. Reducing funding costs through increased liquidity in existing markets for national mortgage assets, or through developing a new pan-European market will benefit consumers through reducing the cost of funding, facilitate product improvement, help extend market unity and lower barriers to market entry for new lenders. The UK therefore supports the Commission’s willingness to explore the potential of market-led initiatives in this area and believes it should be a priority of work going forward to ensure the existing diversity of funding options is protested and promoted. Retail lenders are also becoming increasingly active on the world stage as they seek growth and efficiency through international mortgage businesses.
The Green Paper was designed to encourage debate among EU member states and examine the case for Commission action in the EU mortgage credit market. It asked if greater EU involvement in the individual national markets would make them more efficient and competitive and lead to better value for consumers.
Advice no-no
European Union intervention in advice regarding mortgages will prove costly and will not deliver greater integration, according to the FSA and HM Treasury. In a response to the European Commission’s Green Paper on mortgage credit in the EU, both parties, from their own experience of regulating financial services, said the cost of intervention could vary widely depending on the measure being implemented.
In respect of the Green Paper itself, the industry is concerned that the Commission might focus on the promotion of cross-border shopping by consumers, which would lead it to propose legislation to harmonise products. Since this is a niche market, harmonised products are not seen as a practical or efficient route to market integration.
In the UK’s view it is fundamental that information should be provided at a stage that enables consumers to shop around and compare mortgages. The principal objective should be to ensure the consumer has the opportunity to consider the information before being asked to commit to a particular product. Consumer research is essential in order to establish a balance between detail and quantity of information that best helps consumers compare offers. While the UK welcomes the Green Paper’s recognition of a need for balance when providing information, it is important to recognise that legislative standards for consumer information would involve significant costs for the industry, which would be passed on to consumers.
The consultation on the Green Paper ended at the beginning of December. At a stakeholder conference in December 2005, Charlie McCreevy, internal market commissioner for the EU, reiterated he will make no proposals unless he is convinced they will increase competition, efficiency and choice in the EU mortgage credit market.
Costs and benefits
As part of the consultation procedure, the Commission published a study, which was put out to a London-based economics consultancy. This looked at the costs and benefits of further harmonisation in this sector for consumers and the industry.
At the consumer end, the study shows there is demonstrable appetite among homebuyers to engage in mortgage credit transactions with foreign lenders. Lenders too seem keen to engage in cross-border activity, with over 70 per cent showing an interest in opening branches or subsidiaries in other EU countries and 60 per cent showing an interest in other forms such as mergers and acquisitions with foreign lenders.
The industry claims the most realistic and efficient way to promote mortgage market integration is to tackle the barriers that prevent or discourage lenders from establishing a physical presence in another national market. This may be by the setting up of a subsidiary, mergers, acquisitions or joint ventures with local players. All persons concerned oppose the adoption of mortgage specific legislation and support the maintenance of the voluntary code of conduct.
Consumer organisations, for their part, have also voiced a number of concerns with the Commission’s initiative. They claim it is not necessarily in the interest of consumers to have access to all credit products available. According to them, it is quality of choice, not quantity that matters. They fear that harmonisation may lead to the deterioration of the existing level of consumer protection. They also underline the importance for the provision of clear, comparable information that is in plain and understandable language.
Despite this, the industry and the Commission are agreed on one point – a clear and objective business case must be made before any action is taken. In the industry’s view, the case for intervention hasn’t been established.
John Rattigan is compliance director at Cartel
