Judging by the amount written about the euro and its possible effects on the UK mortgage market, y...
Judging by the amount written about the euro and its possible effects on the UK mortgage market, you could be forgiven for thinking we are about to witness something truly momentous. But for every piece that predicts sweeping changes to products and the way they are serviced, there is an equal and opposite view that the advent of the euro will make little or no difference to the life of the average introducer or lender.
As ever, the truth probably lies somewhere in the middle. Undoubtedly, the propensity exists for there to be a great deal of change to our market if the UK moves towards currency convergence. However, if the decision is taken to stay outside of Euroland for the time being, then, with the exception of interest rate pressure, that change is likely to be minimal.
But while the impact of the euro and currency convergence may not be felt overnight, its progress is inexorable and only those who are already starting to plan and prepare will prosper in an environment that looks certain to be even more competitive than it is now.
If we imagine a pan-European market in which up to 15 players, including the UK, are operating under a single currency, what will life be like for introducers, lenders and servicers of mortgages?
My guess is that life will be tough for the small players. As far as lenders are concerned, big will be beautiful with a spate of mergers and acquisitions, many across border, as the major players position themselves to take advantage of the opportunity provided by a bigger market. But the key will be to acquire expertise and local knowledge. If any lender is to be successful operating in another country, they need to work with existing players, notwithstanding the advent of a common currency.
It is a common misconception at the moment that the cost of borrowing must be cheaper in Europe than in the UK because of the lower base rates enjoyed on the continent. But this is not so. The UK market is so competitive at the moment, with so many discounts and special deals available, that the cost of a mortgage for a UK borrower is currently less than in Germany or France.
The profile of the European market is very different to the UK in a number of important areas and the mindset of borrowers is also different. Long-term fixed-rate mortgages are much more prevalent in Europe than in the UK, fuelled largely by a more stable interest rate environment. Whereas in the UK, the initial charging rate is a much more important consideration for borrowers who typically look for the best two or three-year fix or a discount against SVR for the first one or two years.
The UK enjoys one of the highest levels of owner occupation in Europe. The ratio of debt as a proportion of GDP is among the highest and along with the dominance of variable rate mortgages, we are much more susceptible to interest rate volatility in terms of its effect across the whole economy than our European neighbours.
For this reason, a major factor in the decision to go with monetary union has to be timing. To go in at the wrong time when our economic and housing market cycle is out of line with that in mainland Europe could be disastrous. This is borne out by the Irish situation. The economy and the housing market are booming in the Republic and yet there is an possibility that the European Central Bank may bring about a reduction in rates at a time when the Irish would be looking to raise rates to counter galloping house price inflation.
For the UK to move when its housing market is out of line with its EU partners and be subject to interest rate policy which is inappropriate to its needs, could seriously undermine the market and convince people to seek alternatives to property as a hedge against inflation. To go in when rates are too high for the prevailing economic conditions could have a stultifying effect on the market and choke off demand among buyers as well as cause difficulties for existing borrowers. Whereas to go in when rates are too low could fuel house price inflation and make life difficult for first time buyers in particular.
So what can we expect if the UK opts for the European Monetary Union (EMU)? It is generally assumed that interest rates under the European Central Bank will be lower and more stable than those traditionally enjoyed in the UK. But this is not necessarily so.
The UK does have a good track record in recent years of controlling inflation through the interest rate setting policies of the MPC. There is no reason to believe that if we stayed outside, we would be any less successful in matching interest rates to prevailing economic conditions. It is therefore possible that we could see rates in the UK below those existing on the continent.
But if we put our faith in the treasury mandarins of London and Brussels to surpass themselves and get it spot on, how would this affect the market we know today in terms of product and demand?
Undoubtedly there would be a shift away from variable rate products to fixes as confidence in rate stability grows. Those fixed rates are likely to be of much longer duration than those traditionally seen in the UK and over time, our market could move more towards the US model with much more commoditisation of product. This would be bad news for both borrowers and introducers with the range of products available from lenders narrowing significantly.
The other knock-on effect of longer-term fixes is less churn and far fewer re-mortgages. This again, could be bad news for IFAs with transactions reducing and a greater reliance on mortgages for purchase. Similarly, with product convergence and less choice, clients might feel less need to seek independent advice when looking to borrow in the UK.
Opportunity will come from being able to place mortgages with European lenders, many of whom would be keen to break into the UK market and who may tailor products specifically with the UK borrower in mind. Many of these lenders had experience of our market in the 80s and 90s and could be ready to respond to the challenge very quickly. They would almost certainly look to use an established UK servicer or packager to get to the market quickly and the smart IFA will have already developed a relationship with a number of key players in order to secure a piece of the action.
With greater product commoditisation and less interest rate volatility, more lenders will be looking to securitise their loans as a means of funding, again pointing to opportunities for experienced servicers and processors.
Most lenders in the UK will already be planning on the basis that currency convergence will happen at some point in time. The impact on systems could be as significant as the millennium bug, depending on the generally accepted degree to which historical data will have to be converted.
Even if the UK stays outside of EMU, some lenders and servicers who operate in more than one country will have to be prepared for the rigours of dual reporting and the delights of triangulation. Some lenders of course have already jumped on the bandwagon of offering "euro mortgages" but in effect, these are little more than marketing gimmicks at present.
What to consider
It is fine to have a euro mortgage if you work on the continent and are paid in euros, but if you work in the UK and pay your euro-funded mortgage in sterling, you run the risk of losing out to fluctuations in currency rates that could see debts increasing in real terms.
Many people believed that currency convergence under the euro would lead to some kind of idyllic pan-European mortgage market where lenders in the UK would happily lend to a German couple buying a holiday home in Spain. This was certainly the view of some of the American lenders and servicers who saw the UK as a convenient springboard into Euroland. But it won't happen.
Even with a common currency, regional differences are just too great to overcome. Different property laws, variations in contract and registration processes, taxation and subsidies, all make full harmonisation just a distant dream.
Some of the bigger lenders will undoubtedly look for the means to tap into such a big market, but this is only likely to be achieved through a joint venture partnership with a lender in another country, or through using a Pan-European servicer.
When the promised referendum comes in the next parliament, people will vote for or against for a whole variety of reasons. But how many will give a second thought to the effect that the outcome might potentially have on the way they finance their borrowing for mortgage purposes?
Steve Haggerty is managing director of Homeloan Management (HML)
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