Ireland takes Second Place in Highest Interest Rates of the Euro Zone

Ireland has fallen behind Greece of having the highest interest rates in the euro zone. Irish interest rates are currently standing at 3.04%. The average interest rate of the euro zone is 1.79%. The 2 per cent difference presents many differences and issues in Ireland’s economy and more specifically the housing market.

High interest rates affects spending of both businesses and consumers. The cost of borrowing money increases while interest rates also rise. Often, the higher the interest rates leads to less spending, borrowing and investing by businesses and consumers.

 

Why are Irish interest rates among the highest in the euro zone?

Enforcing security on a mortgage is much prominent and more complex here than in other countries of the euro zone. In other countries, it is common to seize a property when individuals cannot pay off their mortgage debts. Thus, interest rates are so high here to ensure that banks will enough assets to minimize losses if something were to go wrong.

Lending has become less attractive because the uncertainty of returns on loans. Because repossessions …

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Will Ulster Bank Dominate the Housing Market

Recently, Ulster Bank, a major mortgage lending bank, announced a drastic interest rate cut down to a 2.3% fixed rate for two years. Essentially blowing their competitors out of the water.

Against all other players in the market, the Ulster Bank is offering the lowest rate of all.

Ulster’s closest competitors, being the center at Haven Mortgages with a fixed rate set at 2.8%. All other banks showing rates setting at 3% – 3.2%.

The lingering question after this announcement by Ulster is, will we be seeing a shift in other banks to lower their rates as well?

This is an important question for the borrowers as well as the lenders for it impacts the business trend between banks.

If the competing banks believe they need to to stay competitive then it is likely that we will, however, if they have the advantage to keep them ahead of their competitors then they will have no need.

It is hard to say for sure if the other banks will follow in suit and lower their interest rates but that is genuinely …

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The big switch

The time is coming near where One Big Switch say they will be shaking up the mortgage market in Ireland by using the power of group persuasion to get a bank to make an offer that is lower than that which is currently available.

Is this likely to succeed? In particular given that even the Central Bank and Government have failed when it comes to demanding that banks lower their rates?

We would think ‘yes’, because this campaign speaks to banks in the language they understand most, that of customers and money. With loan growth becoming much slower and aggregate credit continuously shrinking for the last eight years, it means that banks don’t have a large amount of choices for new business.

Attrition will be part of the plan and it isn’t one shackled by the Central Bank lending rules because they don’t apply to switcher loans where there is not a top up element to the loan. This means you take a proven credit track record and equity in the property and you obtain what we refer to as …

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Mortgage Debt for Equity swaps

A popular idea that has been discussed in the past (and if Niamh Hennessy’s article proves correct may become working reality) is that of banks taking equity in the family home in exchange for reducing the debt on the property.

I’d like to go through this by looking at the differences in cost, the difference to the mortgage holder and to take a look at why it may not be a great idea.

The bank balance sheet currently looks like the picture to the right, the value of the asset (the loan) is based upon the amount of finance advanced, not the value of the underlying security.

Remember: When you put in your deposit, you are the first equity owner, if prices fall the owners equity is wiped out first which is why ‘negative equity’ is a talk about current value versus the mortgage secured and not just current value versus market value.

People who’s property fell 40% but who have no mortgage cannot crystallize …

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Failed regulation in the Irish market

There are three broad benefits to regulation of a financial system.

Firstly, avoidance of negative externalities, often the societal costs of these outweighs the private cost and prevention is possible when a regulator is function well and doing their job correctly. They do this by preventing excesses, by promoting conservative risk management in the financial sector and helping to maintain confidence by ensuring (for instance) that a liquidity shortfall in one institution doesn’t spill over into others (i.e. avoiding multiple bank runs which take down well functioning solvent banks in their wake) resulting in a widespread credit crunch.

Secondly, to set solvency and reserve requirements for banks, at times there are significant asymmetries in information within the consumer/institution relationship, or worse still, information gaps (where both institution and consumer don’t have full information – as happened in the sub-prime loan market in the USA), when nobody can determine the quality and reliability of a financial product a strong regulatory environment will ensure that banks are in a position in which they can …

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