The introduction of the euro is expected to have a significant impact on the mortgage market, particularly on the funding side. Moreover, because Irish financial institutions will have a far wider range of funding methods to choose from and new lenders will enter the domestic market, borrowers will be offered a wider range of mortgage products.

There will be greater availability of 10 year fixed interest rate mortgages and even thirty year fixed rate mortgages could be seen.

While euro notes and coins will not be in circulation until January 1st, 2002, financial institutions are likely to market euro accounts from January 1st, 1999. Because there will then be no exchange risk, investors in Ireland (and in other euro countries) will be free to deposit funds in cross border euro states and avail of more attractive savings products and higher yielding investments. However, different levels of withholding taxes in European states and different treatments of non-resident accounts remain a problem. That situation is now, rather belatedly, being addressed at Commission level. Following the ECOFIN meeting in December, consideration is now being given to a draft proposal that a minimum withholding tax (likely to be 15 per cent) would apply to all interest bearing accounts, both resident and non-resident. The withholding tax on interest on ordinary Irish deposits is currently 26 per cent.

However, the position with regard to the off-shore tax havens - Jersey, Guernsey, and the Isle of Man - remains unclear. This loophole will have to be closed, otherwise funds could flow from the euro states to these tax havens because of the withholding taxes in the euro states. Failure to harmonise withholding taxes across Europe could result in large movements of funds and would lead to uncertainty in the retail funding market. As a consequence, mortgage lenders may become more reliant on funds from the wholesale markets.

Other areas of funding, including increased securitisation and the introduction of mortgage bonds, may be considered. Mortgage bonds have long been a feature of the European market. Basically, a financial institution raises funds through issuing a mortgage bond on wholesale money markets. These bonds are aimed at pension funds, institutional and individual investors who are paid a premium over and above the return available on Government bonds.

Some 30 per cent of mortgages in Europe are funded through mortgage bonds and in Denmark, for example, some 70 per cent of pension funds have invested in mortgage bonds.

Mortgage bonds would allow Irish financial institutions better access to funding to back longer term fixed interest rate mortgages. Thus, the introduction of the euro and the likely changes to funding structures could lead to new products and new forms of funding. For mortgage lenders the introduction of the euro will bring new opportunities. These will arise from:

The availability of cross border funds;

New funding Instruments;

Convergence and harmonisation of witholding taxes;

Increased mortgage demand:

However, Irish mortgage lenders will also face many challenges and their reaction to such challenges will determine their progress and development in the post euro era. These challenges will include:

Mobility of savers funds;

Expected structural changes and cross border relationships;

Pressure on the funding side;

Significantly increased competition:

For the consumer there will be many benefits arising from increased competition on both the funding and lending fronts. Savers will get a wider choice of saving vehicles because of the removal of currency risks with a new single currency throughout Europe. Borrowers are likely to benefit from low and stable interest rates and this in turn should lead to a higher level of longer term fixed interest rate mortgages. Borrowers are likely to see a larger variety of mortgage products and the removal of any exchange risk will facilitate taking out mortgages with cross border institutions.

However, the Government must give favourable consideration to proposals from lenders seeking taxation changes aimed at stimulating the longer term retail savings market.

For example, the Irish Mortgage and Savers Association has made two submissions to the Government to have the term of Special Savings Accounts extended to five years in order to give lenders the ability to market more fixed rate longer term products.

Instead the tax rate on SSA interest was increased from 15 per cent to 20 per cent in the last Budget, effectively a death knell for SSA's. Whilst it is generally considered that mortgage lending in Europe will continue to be fragmented along national lines, it is expected that the single currency will induce structural changes in the mortgage markets.

Some institutions may benefit from being part of a larger institution, either nationally or cross border. It is likely that "relationships" will develop on a cross border basis.

Other lenders may prefer to remain niche players within their own market. However, we may see a continuing contraction in the number of lenders.

My own view is that mortgage lending and mortgage credit will remain a local business.

Des Byrne is director general of the Irish Mortgage and Savings Association.