There was a time during the Celtic Tiger era when people in the market for a mortgage were spoiled for choice. There were loads of lenders from home and abroad falling over themselves to hand out buckets of money to pretty much anyone who asked. Mortgages of 95 per cent, 100 per cent or even 105 per cent were commonplace.
In hindsight, it was all very, very stupid.
That reckless lending was in large part responsible for the economic crash that subsequently brought the State to its knees. Some banks collapsed, others were swallowed up by larger players and some fled the State with scarcely a backward glance at the mess they had left behind.
The mortgage market contracted sharply and the number of lenders willing or able to issue mortgages shrank alarmingly.
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Lenders have been returning to the market slowly, with the likes of Avant Money offering home loans and Revolut apparently forever on the cusp of joining them without actually doing it.
But the weeks ahead will see the biggest shake up in the sector in a generation when the credit union movement joins the party – if that is not the wrong word given its grim association with the sudden and shocking death of the Celtic Tiger.
While some credit unions have been issuing mortgages for some time, it is going to become a much bigger feature of the market as a result of moves from the Central Bank.
As it stands there are 203 regulated credit unions in Ireland. The total loan book of the Irish League of Credit Unions (Ilcu), which represents 90 per cent of credit unions, comes in at just over €6 billion.
Mortgages accounted for €685 million of that, or 10.4 per cent. The percentage is significant because, under Central Bank rules, credit unions have only been allowed lend between 10 and 15 per cent of their assets for mortgages.
From the end of September, that will rise to 30 per cent of total assets.
But what difference will that make for borrowers?
Michael Dowling is a financial adviser and a lifelong supporter of the credit union movement. As chairman of Malahide Credit Union, he does have at least some skin in the game
He reckons the Central Bank changes could have a big impact in the market here.
“I believe the potential of credit unions to become a significant player in the mortgage market is enormous, he says.
For starters, they already have a captive and hugely supportive audience with more than 3.3 million members and a popularity that is unparalleled. Every year for a decade, the annual CXi survey which ranks brands based on consumer experiences has put the credit union movement at number one.
Finishing top of the pile for 10 consecutive years is an unheard of achievement across global CX league tables, the author of the report, Michael Killeen, said in the most recent report, adding that the credit unions’ formula for success was simple – “members are always put first”.
Dowling echoes that view.
“Credit unions have a significant branch presence throughout Ireland which will enhance their offering to potential mortgage customers,” he says. “A mortgage is a complex product and the ability to engage locally with an actual person will give them an advantage over all the banks.
“We have seen banks reduce the engagement and service they offer in their branches over the years.”
He also notes that credit unions have very large deposits, amounting to over €15.6 billion at the end of March this year. That means access to funding to offer as mortgages will not be an issue.
“Credit unions do not have shareholders and they are not motivated by profit,” Dowling adds. “They can lend at very competitive rates in comparison to any lender in our market. In fact, some credit unions today have cheaper interest rates for mortgages than are offered by mainstream banks.”
He also points out that, as a credit union mortgage holder, people “will not be concerned about the ECB increasing or decreasing interest rates as your local credit union will be lending with a greater moral responsibility, not seeking to exploit its customers [for profit] like the mainstream banks do in the variable interest rates they offer their customers”.
He accepts there are challenges to be faced and decisions to be made.
He believes all credit unions should charge the same interest rates on home loans and acknowledges that some individual credit unions may not have the asset base to offer mortgages, although they will have the capacity to refer their members to a bigger credit union for a home loan.
There will need to be enough qualified, trained and experienced staff in credit unions to underwrite mortgages and Dowling wonders how credit unions – which are in essence “a local community bank” – will deal with customers who get into arrears on their mortgage?
Nick Charalambous, managing director of Alpha Wealth, says the Central Bank’s decision to increase credit unions’ lending limits “has the potential to add real competition to the mortgage market”.
“Up to now, credit unions have held a very small share of the mortgage sector, with banks and a handful of non-bank lenders dominating the space. The reforms, which will allow credit unions to triple their capacity for house and business lending, could enable them to play a more meaningful role,” he says.
He suggests that, for borrowers, the immediate benefit will be choice.
“Some credit unions already advertise competitive mortgage rates, which compare favourably with many bank offers. However, rates vary significantly between institutions and, in some cases, are higher than the best available deals from specialist non-bank lenders.”
He believes the advantage of credit unions “often lies less in headline pricing and more in their flexibility, reduced fees and the ability to take a more personal approach with members who may not meet the rigid criteria of the major banks.”
He adds that the increased involvement by credit unions “also diversifies the mortgage market, reducing the reliance on a handful of large lenders”.
“That is positive from a systemic point of view. For first-time buyers in particular, the presence of a trusted community-based lender with enhanced lending power could improve access to finance and put some downward pressure on rates across the market, even if the overall impact will depend on how widely credit unions take up the opportunity.”
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
