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Weak competition and sins of the past make our mortgages eurozone's most expensive

We have the most expensive variable rate mortgages in the eurozone in this country. The cost of a new mortgage here is almost twice what borrowers pay elsewhere in the currency zone.

The high rates mean a first-time borrower who takes out a €250,000 mortgage will end up paying almost €70,000 more over the life of the loan than the average in the euro currency area.

The average interest rate issued on a new mortgage in July was 3.21pc, which is a slight fall from the rate of 3.23pc in June, according to the Central Bank.

Banks including Ulster Bank and KBC have recently cut their fixed rates, with Ulster offering a two-year fixed offer of 2.3pc. But rates here are still higher than the eurozone average of 1.77pc.

This means a typical first-time buyer who has borrowed €250,000 over 30 years will pay an extra €190 a month than their European counterpart, according to price comparison site Over the lifetime of the mortgage, this equates to more than €68,000 extra. And banks here are hugely profitable. AIB made €1.3bn in pre-tax profits after exceptionals last year, with Bank of Ireland making €850m.

However, is there any justification for the high mortgage rates, or is it an example of good-old fashioned price gouging by banks that were bailed out showing their ingratitude to taxpayers?

The fact that lending rates have come down dramatically in the past two years means that there certainly has been mortgage overcharging going on here.

However, other factors are also at play.

Past and continuing high level of arrears are a big factor in why loans of all sorts are expensive on this island.

One banking analyst at Davy Stockbrokers, Diarmaid Sheridan, pointed out that low-earning trackers were a major drag on the banks. A bigger factor, he reckons, is the amount of capital banks have to put aside in Ireland when they issue a mortgage compared with the rest of the eurozone. This mainly reflects past losses and arrears.

This capital, known as the risk-weighted assets, is as low as 14pc in France, and is 15pc in Spain. In Ireland it is 42.5pc, the highest in Europe. In the UK, which is not in the eurozone, the equivalent figure is 9.4pc.

Another factor is that this is a small market, and a feature of such markets is high charges as competition tends to be weak. Real competition would result in a further sharp drop in rates.

But it seems that expensive mortgages here are largely due to the fact that we still paying for the sins of the past.

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