Signing up to home loans without frontiers

The European Commission is set to unveil a white paper on cross-border mortgages, writes Patricia Kelly.

Buying a house is for most people their biggest ever financial transaction. Yet only 1% of Europeans - mostly purchasers of second homes or people living in border regions - take out a home loan from another European country. This state of localised lending might yet change: the EU’s single-market warriors are planning to focus on consumer-related financial services, at the core of which is mortgage credit. If all goes according to plan, househunters could soon be contacting banks in Germany, the Netherlands or Estonia to obtain a mortgage for property in the Belgian Ardennes or the south of France.

From the perspective of lenders, there are two main issues. Does the borrower have the resources to repay? If it all goes belly-up, can the property be repossessed without too much hassle?

As far as potential buyers are concerned, the only thing that is clear is the scope for consumer confusion. Key issues are knowing exactly what is being offered and how to avoid dodgy dealing. They need full information on lenders and the terms of lending - what, for instance, are the penalties or constraints if they want to pay off a loan quickly or if they want to switch borrowers. There is also a bewildering choice of mortgages available.

The European Commission is planning to ride to consumers’ rescue after four years of talks with the mortgage industry that will result in December in a white paper on mortgage credit. This new strategy is supposed to reinforce the trend towards more open and competitive mortgage markets within the EU. The UK has the largest mortgage market in Europe, accounting for a quarter of the mortgage business in the EU15 and the British are leading the way. British lenders are actively encouraging EU efforts to promote open, competitive, diverse and efficient mortgage markets within the single market in the belief that this will help boost economic growth.

There is already a voluntary code of conduct. Back in 2002 more than 3,600 mortgage lending institutions signed up to the code, designed to encourage cross-border competition by guaranteeing that customers may easily compare information on housing loans from different lenders in different countries.

Another significant development was the launch last November of the European Land Information Service (EULIS) database, to register and monitor property and home ownership - a big variable across Europe. Some countries such as Belgium, France, Estonia and Germany have highly effective systems based on notaries publics. The UK, on the other hand, has three land registry services, though they are centralised and the data is available electronically. The eulis.org database already holds details of more than 39 million registered properties in England, Wales, Scotland, Ireland, Austria, Finland, Lithuania, the Netherlands, Norway and Sweden, with more countries expected to join. The idea is to support a single European property market and cross-border lending by providing information about how conveyancing and registration systems work in different countries. Shopping around clearly saves money on conveyancing costs: a recent study shows Estonia and Germany offering the best value for cheaper properties with the English more economical at the higher end of the scale.

But the driving force behind the development of a European mortgage credit market may not be the lending institutions themselves. It could be financial intermediaries. London’s Financial Services Authority has identified close on 7,000 mortgage intermediary firms operating in the UK, generally small operators searching out the best deals for individual customers.

Given the importance that consumers place on face-to-face contact in purchasing a mortgage, lenders may increasingly choose intermediaries like mortgage brokers as a way of expanding their reach across borders into other countries, without having to set up costly branch networks. The UK model could be extended to other countries. ‘Credit intermediation’ has been flagged by the Commission for further study.

• Patricia Kelly is a freelance journalist based in Brussels.

The European Commission is set to unveil a white paper on cross-border mortgages, writes Patricia Kelly.