Daily Research News Online no. 2260 - Euro Mortgages Catch the Attention

Euro Mortgages Catch the Attention

March 27 2003

A new report from Mintel in the UK finds 62% of mortgage holders willing to switch to a euro mortgage if it means paying a lower interest rate.

With stocks falling in most major markets, the past two years have seen property power ahead as the world's biggest asset class. In almost all major countries, with the exception of Japan and Germany, house prices have outpaced inflation, boosted by the low interest rate environment. In Europe house prices have risen an estimated 7% in the past year whilst the harmonised inflation measure is up only 2.2%. Meanwhile the FTSE Eurotop 300 Index of leading European shares lost a third of its value during 2002.

It is still largely the case that an Englishman's home is his castle. Some 69% of British people live in their own house or flat, which is higher than the European average (59%). In Germany, however, the majority of people live in rented accommodation, with only 41% living in their own house or flat.

Since the introduction of the euro there has been an explosion of mortgage lending in the Southern European countries, as well as in Ireland. 'The advent of the euro with its low interest rates makes the mortgage market in theory an attractive area to force convergence in mortgage rates and demonstrate how its citizens are to benefitfrom a single market in financial services' comments Paul Davies, Senior Finance Consultant. According to Mintel's exclusive consumer research, however, 4 in 10 adults believe mortgage rates would go up if the UK were to join the eurozone. It is a key research finding that the Treasury will need to address in their deliberations.

Of the 608 mortgage holders questioned by Mintel some 62% indicated that they would consider switching to a euro mortgage if the interest rate was lower. The younger age groups are more likely to be attracted by a euro mortgage, with agreement reaching 70% among the 16-34 year-old.

For a quarter of mortgage holders, however, switching to a euro mortgage presents too much of a gamble. Almost half of all mortgage holders say they would not want a euro mortgage as they would worry about fluctuations in the exchange rate.

Overall 39% of the adult population believe that mortgage interest rates would go up if the UK were to join the eurozone and have the euro as the nation's currency. A similar percentage of the population, however, doesn't have a view on the matter (38%). 'With mortgage payments such a key part of people's monthly budgets, people will need to be made very aware about the impact of euro entry on mortgage rates' comments Paul Davies.

Mortgage holders feel more strongly that mortgage rates would rise should the UK join the eurozone. Almost half of mortgage holders (49%) believe this to be the case while only 16% believed rates would fall.

The value of residential mortgage loans outstanding in Europe totaled euro 3.7 trillion at the end of 2002, a rise of 11% in two years. Declining interest rates fuelled growth, which in turn sustained demand for housing despite the house price increases in most European countries. Mortgage lending represents around 40% of total banks lending in Europe and is a major source of income for its bank. In the UK the proportion is 53%.

The UK is the second largest European market in terms of value of outstanding mortgages at euro 990 billion, with a greater emphasis by lenders on the owner-occupier market, although buy-to-let mortgages have become popular as the stock market has fallen in the past few years. Germany is the largest market with euro 1.1 trillion outstanding.

The housing market continues to be one of the few economic sectors that is holding up fairly well in the face of slower economic growth and declining consumer confidence. The housing market drives the British economy to a much greater extent than occurs in the eurozone. At present, mortgage equity withdrawal has jumped to 6.6% of household after-tax income and without this injection of borrowed funds, the consumer boom would be running out of steam.

Worries, however, are growing and continue to be expressed in the media about the increasing mortgage debt of the UK's and Europe's households, but to date a combination of low interest rates and economic growth has protected banks in mature economies from significant declines in credit quality.

Overseas property purchase has received considerable publicity in the past two years as consumers take advantage of the strength of Sterling, low-cost airfares, and low mortgage rates. According to trade sources, demand for foreign mortgages increased strongly during 2002 as more people bought property abroad. Property acquisition in the eurozone increased by 64% while euro loans soared by 70%. France the European barometer on the health of the property market, is extremely buoyant from the North down to the South of the country. Almost half of those who would consider buying a holiday home abroad would opt for a euro mortgage. Consumers aged 25 to 34 are most likely to consider euro mortgages for overseas property purchases (58%).

With more people deciding to live and work in Europe either permanently or temporarily, the demand for information and services surrounding euro-related finance will grow.

The majority of consumers expect mortgage rates to rise in EMU and it is this fact that requires considerable education of consumers about the impact of EMU on their personal finances in the coming months. 'With weak consumer sentiment in the eurozone this past year, learning lessons from fellow European consumers' personal finance experiences will be essential to provide a balanced assessment of the risks of EMU' concludes Paul Davies.