Few take up offer of euro mortgages

Euro loans are now available from most of the mortgage lenders although few people have taken them up. The mortgages work in exactly the same way as ordinary mortgages, except the pound amount is converted to euros. The banks do not charge commission for this conversion.

According to Ms Joan Gleeson, marketing manager at Bank of Ireland Mortgages, the one advantage could be for someone who has a source of income from another European country and does not want the hassle of converting it. They could simply be paid in euros and pay their mortgage in euros, she says.

But apart from that, there are few benefits now, although the banks are expecting applications from the kind of people who like to be first.

Ironically, it is euro mortgages in countries such as Britain which are not in the euro which will provide the biggest benefits. Some of the biggest UK companies are considering paying a proportion of salaries in euro, allowing UK borrowers to benefit from the much lower rates already available here.

While the euro has not had much impact yet on the mortgage market, most observers expect its effects to be far reaching over the next couple of years.

Most of the lenders are now expecting that more and more people will move into fixed rate mortgages, up even from the current 75 per cent.

According to Ms Gleeson, there is likely to be a move to longer term fixed rates of 10 and even 20 years and to even lower rates of between 5 and 6 per cent for the longest of loans.

However, a spokesman for Irish Permanent says it does not see any demand for longer term rates as the redemption penalties to exit from a 10-year loan early could be enormous.

However, according to Ms Gleeson, in France and the US, there are practically no early redemption penalties, and the Irish market could move in that direction as it begins to take advantage of the far larger euro market, where it will be much cheaper to come out of one type of loan and into another.

The banks are also expecting a move to first mortgages being taken by people in their 30s rather than their 20s, in line with the European model. Of course, a large scale move to the rental sector will need some sort of legislative reform to give tenants some additional protection. The other issue which is occupying the minds of the lenders is the possible entry of major European lenders into the market. But many of the lenders are optimistic that the different culture and habits of other countries' institutions, as well as a national bias to our own institutions, is likely to negate somewhat the impact of further competition.

On top of that, it is likely that the regulatory, legal and tax framework may not come into harmony as fast as some expected.

Nevertheless, the lenders are all actively looking for ways to raise funds more cheaply and efficiently on European markets. So far, there is some discussion that a German-style mortgage bond could be introduced following some legislative changes and the lenders are also in discussions with the Central Bank about the introduction of a new mortgage-backed security. The Central Bank is still in negotiations with the European Central Bank in Frankfurt about the introduction of the this new method of fundraising.

However, if introduced as expected at the end of February, it should allow the banks greater access to the money markets and reduce their dependence on savers.

In fact, much of the traditional relationship between savers and borrowers could be lost. On top of that, the new funding mechanism could allow the banks to access cheaper funds in the money markets, passing the benefits on to consumers.

The so-called mortgage trust promissory note is likely to become available to all lenders across all the euro zone countries, giving them access to cheaper money and more secure funding.

As one mortgage insider noted, a 10-year rate below 5.5 per cent without large redemption penalties is something that most lenders would have dismissed out of hand in the recent past. Nevertheless, it is now beginning to look like a more and more realistic proposition.