Non-bank lenders offer the greatest hope of driving down Irish mortgage rates, as the State's banks – charging well above the European average – must hold up to five times as much expensive capital against home loans as they did before the crash, a Department of Finance study has found.
“Irish mortgage rates are a product of many variables and could be somewhat lower if there were more competitors active in the market,” according to the report to be published on Monday.
However, the report said overseas banking groups that may ordinarily look at entering the Irish market would be subject to as high capital demands on mortgages as existing players in the market.
Irish banks must hold as much as three times the amount of capital reserves against mortgages as the European average, due to the scale of the loan arrears crisis in the Republic after the crash, and the ongoing difficulty for banks in enforcing security against mortgage loans – ie the low rate of repossession.
“Non-banks or retail credit firms that are not subject to the same capital rules have a valuable competitive advantage when it comes to pricing and could represent a real and under-appreciated competitive advantage to the incumbents in the years ahead,” the report said. “Clearly such an advantage would be weighed up with all the other characteristics of the Irish market in determining whether to compete, not all of which are positive in nature.”
The number of mainstream mortgage lending groups in Ireland has shrunk from nine to five over the past decade, as Bank of Scotland and Danske Bank retreated during the crisis, Irish Nationwide Building Society collapsed and EBS was taken over by AIB. This has reduced competition.
Funding models
The fledgling non-bank lending market includes Dilosk and Finance Ireland. Dilosk acquired the ICS Mortgages brand from Bank of Ireland in 2014 and is looking at developing residential home loans business this year, having previously focused on buy-to-let lending. Finance Ireland has entered the market after buying Pepper Money's €200 million home loans portfolio last October. Both firms' funding models are built around refinancing pools of loans in international bond markets through securitisation.
The average standard variable rate for new loans in the State currently stands at 3.04 per cent, compared to a euro-zone mean of 1.79 per cent, according to Central Bank data.
The department report said this headline figure ignores the fact that banks in many other European markets charge upfront fees when extending a mortgage, whereas this is not a feature of the Irish market.
Including upfront fees, the euro-zone average rate rises to 2.11 per cent, the report said, citing European Central Bank data.
Variable rates
Adjusting the cost of Irish variable rates for cash-back arrangements that have become popular in recent times would lower the State’s average annual percentage rate of charge to 2.97 per cent – narrowing the overall gap with the rest of Europe to 0.86 of a percentage point, it said.
The report said Ireland’s higher variable rates are also being used to subsidise older mortgages on banks’ books that track the European Central Bank rate.
“Trackers, which are still just over 40 per cent of mortgages outstanding, help explain why the average overall mortgage interest rate in Ireland is nearer 2.5 per cent according to ECB data, with the European average at around 2.1 per cent,” it said.
The high levels of capital that Irish banks must hold are a function of how risky regulators have assessed their mortgage books to be. Bank of Ireland highlighted last month that its so-called risk-weighted assets (RWAs) on mortgages – against which it much hold capital – equates to 38 per cent of its residential loans portfolio, compared with 19.9 per cent for Italy, the next highest in the euro zone. UK mortgage RWAs equate to 10.3 per cent.
