The Central Bank should take encouragement from how credit unions have prudently grown their mortgage portfolios, as well as the extent to which credit unions have pooled resources to do more together
Irish credit unions are set to become an even stronger contender in the mortgage market. From this autumn, every credit union in the country will be able to offer mortgages, as credit unions will be able to refer mortgage applications to other credit unions should they not be in a position to provide the loan themselves.
This represents a watershed moment for credit unions and one that will see them eat into more of the banks’ mortgage pie in the coming years. We believe credit union mortgage lending could reach €1 billion annually by 2027, which could put credit unions in the top five mortgage lenders.
Credit unions will also be able to refer applications for other products, such as business loans, current accounts and debit cards, to another credit union. They will essentially be able to partner with other credit unions to offer their members a wider selection of products.
The legislative changes signed in earlier this year could see credit unions become the social financial enterprises of the Irish mortgage market. Following the demise of building societies in the Republic, such a development would be a huge benefit for consumers.
Building societies first cropped up in Ireland in the late 19th century, with the pioneers pooling their financial resources to buy houses. These original building societies were mutual – which essentially meant that their priority was not to make profits but rather to serve their members and to offer them better value savings rates and home loans.
[ Credit unions grew mortgage lending by 71% in the year to end of MarchOpens in new window ]
The demise of the building society was the death knell for the mortgage market as the community home ownership ethos of traditional building societies was lost. Gone was the stable pricing offered by traditional building societies, with consumers and their mortgages then hitched to the vagaries of the international money markets, and suffering as a result.
By becoming a bigger player in the mortgage market, credit unions can fill the gap created by the disappearance of Irish building societies.
The Government is standing full square behind the credit unions becoming a bigger player in the mortgage market. Following a series of meetings with mortgage lenders this summer, Taoiseach Simon Harris said he was “happy to hear” about the ambitious expansion plans of credit unions, including in the area of mortgages. Mr Harris has committed to following up on several matters raised by credit unions, and credit unions are hopeful that this will allow them to lend and do more.
Ultimately it is consumers who will be winners if credit unions can eat into more of the banks’ mortgage pie – and, indeed, if more credit unions are used by consumers for their day-to-day financial services. Credit unions are member-owned financial institutions, so each credit union is essentially owned by consumers, with consumers at the heart of the decisions made by these organisations. This is one of the reasons credit unions can be relied on to provide affordable financial services to their members, with any surpluses reinvested to benefit their members.
Credit unions, first established in Ireland in the late 1950s, have stayed true to their core values of equality, equity and mutual self-help, creating sources of credit for the mutual benefit of their members at a fair and reasonable rate of interest. As a financial co-operative, credit unions make it their priority to offer fair and accessible credit to all of their members, including those who are, or are at risk of, being underserved by the banking sector.
One of the biggest advantages of being a member of a credit union is the price stability of its products and services. As credit unions lend from their pool of savers’ money, their loan rates are not directly affected by movements in ECB interest rates or changes on international money markets. So, while many of those with bank mortgages saw their monthly mortgage bills soar when ECB rates started to rise in July 2022, this was not the case for credit union mortgage borrowers.
Credit unions are acutely aware of the cost-of-living pressures that their members are under and this is reflected in their approach to lending.
Added to that, there are unique benefits offered by credit unions that aren’t available at the banks. For example, many credit unions provide a free benefit, known as loan protection insurance, whereby the balance of a personal unsecured loan is repaid in the event of a member’s death.
Furthermore, to encourage their members to save, a practice considered essential for financial resilience, most credit unions provide their members with a benefit related to and linked with their savings habits. This benefit, which is known as life savings protection, pays a lump sum to a person nominated by a member in the event that they die while still a member of the credit union. In addition, many credit unions invest some of their surpluses into initiatives that clearly benefit local communities, such as educational initiatives and schemes that help communities to become more environmentally sustainable.
While the recent legislative changes are certainly welcome and set the foundations for credit unions to do more, to enable them fulfil their true potential as mortgage lenders, regulations need to be addressed. Under current Central Bank regulations, credit unions can only issue 7.5 per cent of their assets in mortgage lending. In some cases this can increase to 10 per cent and 15 per cent. As the regulator, the Central Bank rightly determines the prudential framework and lending levels for credit unions; however, these levels urgently require modernisation to enable the credit unions to fulfil their true potential under the new legislation.
There shouldn’t be a one-size-fits-all approach to credit unions. Instead, the Central Bank needs to consider a tiered approach to these limits so that those credit unions with proven governance and high levels of professionalism in managing their existing liquidity and loan books can lend more.
True, lending restrictions have been used by the Central Bank for a number of years to reduce what it sees as risks of credit unions over-extending themselves. However, the Central Bank should take encouragement from how credit unions have prudently grown their mortgage portfolios, as well as the extent to which credit unions have pooled resources to do more together. The Central Bank should be willing to lift lending restrictions if certain conditions are met. Its failure to do so is unnecessarily stifling the credit union sector.
Credit unions are willing, able and have consistently demonstrated that they can provide services at very fair pricing. Credit unions can create the competition that consumers and Government would like to see.
Kevin Johnson is CEO of the Credit Union Development Association
