The long downward path of European Central Bank (ECB) interest rates may be at an end. But what does this mean for borrowers? The bank left interest rates steady on Thursday for the third meeting in a row, with the key deposit rate at 2 per cent. This follows eight reductions between September 2023 and June of this year, after a previous big hike in interest rates to deal with soaring inflation. This has fundamentally changed the market for mortgage borrowers. The proposed sale of PTSB could lead to welcome additional competition in the home loans sector.
Here are the five vital points you need to know if you are taking out a new mortgage, or refinancing an existing one.
1. The market is competitive, but there are still differences in rates
Some banks responded more quickly than others to the long downward move in interest rates. In some cases, they cut certain rates, but not others, for competitive reasons.
Up to recently, this had left significant gaps in the mortgage rates available to borrowers, particularly those who do not have homes with high energy ratings. This was relevant not only to first-time buyers – particularly of second-hand homes – but also to many in older homes who were rolling off fixed-rate borrowing terms.
RM Block
The decision by AIB, the State’s biggest borrower, to reduce the mortgage rates on offer to borrowers who do not qualify for its “green” mortgages, for which a Ber rating of A and B is required, addresses that to a degree.
The cuts were substantial, up to 0.65 of a percentage point. The AIB four-year fixed rate, for example, where the loan-to-value ratio is between 50 per cent and 80 per cent, fell from 4.25 per cent to 3.65 per cent. This brought AIB’s non-green rates back to a more competitive position compared to much of the rest of the market. They had been noticeably out of line, in contrast to the bank’s green rates, which have been highly competitive.
This has tightened up the gap between the cheapest and most expensive offers available to many borrowers. But there are still significant gaps – and, for borrowers, there are a host of different rates available depending on loan-to-value ratios, Ber ratings, whether the loan is fixed or variable and some other criteria.
The criteria used by different banks also vary. For example, AIB has green and non-green rates while Bank of Ireland has different rates for each different Ber category. In some cases, there are lower rates for larger loans.
Well-qualified borrowers, who meet the usual criteria of having a steady job and a savings records, can get offers from a number of lenders, according to mortgage broker Michael Dowling of Dowling Financial. And there can be significant differences of half a point or more between the best and worst rates they could be offered depending on their position, which can add up to savings of €100 a month or more.
Shopping around, whether you are a new borrower or someone whose fixed term is coming to an end, remains worth the trouble. A range of comparison sites provide the data, as does the Competition and Consumer Protection Commission (CCPC) or a mortgage broker.
The very best variable and fixed rates are now both around 3 per cent. Your job is to find a loan as close as possible to this, with terms and conditions that suit.
2. Don’t bank on big interest rate changes from here, though the PTSB sale could be significant
After a period of significant cuts, the general level of mortgage rates here may remain relatively stable for now for two reasons. One is that ECB interest rates may not change much – or at all – in the short term, with inflation close to the ECB target of 2 per cent.
The current ECB deposit rate level of 2 per cent is likely to be close to what is called the neutral rate – which neither adds to nor subtracts from demand in the economy. ECB president Christine Lagarde said policy was in a “ good place”, clearly indicating a no-change stance is likely unless something changes.
Weaker euro zone economic data or some kind of geopolitical upheaval – for example related to the poor budgetary outlook in France – could yet send official rates a bit lower next year. But there is only limited room for ECB rates to fall from here and many in the market feel they may already have bottomed out, with some betting on at most one more quarter-point cut in the next year.
In terms of the competitive position in the Irish market, banks do appear to have now reduced their borrowing costs to levels where most are comfortable with their market position. However, the proposed sale of PTSB could introduce a new – and welcome – competitive force. The bank has a 20 per cent share of the new mortgage market, which a new owner could use as a springboard for future growth.
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This is one to watch, even if the nature of the market and the level of interest rates suggests that any new competition is likely to focus on particular areas of the market, rather than leading to a generalised fall in borrowing costs. With ECB rates at 2 per cent, general mortgage offers are not going to fall below 3 per cent.
The only way this would change is if a big slump in the euro zone economy led to inflation dropping well below the ECB target, as happened after the financial crash.
Mortgages are also heavily regulated and so, unlike in the run-up to the crash, there is not much scope for competition in terms of the amount that can be loaned to individual borrowers.
The Central Bank mortgage rules limit loans to four times income for first-time buyers and 3.5 times for those buying a second or subsequent home. In each case the loan is restricted to 90 per cent of the property value.
The banks do have leeway to lend above those limits in 15 per cent of cases for both first-time and subsequent borrowers.
3. Don’t forget the smaller and non-bank lenders
Many borrowers tend to stick with their traditional bank – typically AIB, Bank of Ireland or PTSB – and often this works out just fine. But smaller players are also active, including AIB-owned EBS and Haven, ICS Mortgages, MoCo, Nua Money and Avant Money.
Many offer interesting products. For example Avant, owned by Spain’s Bankinter, has a product called a Flex Mortgage which is linked to Euribor – the European interbank offered rate, an average of the rate at which big banks are lending to each other. It resets once every year based on the Euribor rate at the time and currently offers loans priced from 3.07 per cent to 3.27 per cent. This may appeal to some borrowers, while others will prefer a rate fixed for a period.
Smaller lenders also compete by targeting particular groups. ICS, for example, looks to attract public sector employees and offering products such as longer-term mortgage loans.
4. Read the small print
The key issue for borrowers should always be the interest rate rather than any short-term money-back offers. But there are other issues to keep an eye on, too. Dowling warns that a key one for those taking out a fixed rate product is to be sure to understand the varying policies on making additional repayments – either via a lump sum or higher regular payments. For many this may not be an issue but, if it is, the policies of the different banks vary significantly, with some not allowing additional repayments at all during fixed-rate terms and most having limits.
5. Be realistic
Recent data from Banking and Payments Federation Ireland (BPFI) showed a record 53,500 mortgages were approved in the 12 months to September, but only about 27,000 were actually drawn down in the same period. This shows that while many people are getting mortgage-approved, large numbers are unable to find a place to buy.
“There are a lot of frustrated people out there,” according to Dowling, with a lack of second-hand supply and new homes that qualify for the State support schemes, including Help-to-Buy, typically away from urban centres and requiring long commutes for many. For a minority, a “fixer-upper” may be an option, but it is vital to fully assess what needs to be done.
There is reasonable value available in terms of mortgage offers for borrowers with strong incomes and savings, but options in the housing market remain limited in many cases.
