Dilosk, the first lender to enter the Irish mortgage market after a slew of exits in the wake of the property crash, has hit the brakes – for now, at least – just as new home lending is on track this year to reach levels last seen in 2008.
The non-bank lender, which trades under the ICS Mortgages brand it acquired from Bank of Ireland in 2014, unveiled the first set of Irish home loan rate hikes in years in March by hiking the rates of its key three- to five-year fixed-rate products. It was quickly followed by rivals Finance Ireland and Avant Money.
Three weeks ago, ICS tightened its lending criteria, saying it was temporarily restricting new home loans to 2.5 times borrowers’ gross income, compared to the 3.5 times limit current set by the Central Bank for most loans. First-time buyers approaching ICS for a mortgage now must have a 20 per cent deposit, while movers must cobble together 30 per cent. These, too, are more restrictive than the regulator’s already-tight rules.
Then, earlier this week, it announced increases to its variable rates, effective from October, which effectively takes it out of the races in the already least-competitive segment of the mortgage market. (ICS started off in the buy-to-let market in 2016 before offering owner-occupier loans in late 2019.)
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The Government experienced rising market rates first hand on Thursday when it had to pay a rate of almost 2.22 per cent to sell benchmark bonds, due in 2032, in an auction
The moves underscore how non-bank lenders, who are reliant on capital markets rather than deposits for funding, are at the coal face when financial markets turn ugly. Banks, on the other hand, are awash with excess deposits that were facing a negative charge when stored at the European Central Bank until recently.
Market borrowing costs, meanwhile, have spiked across the euro zone in the past eight months as the ECB wound down net bond purchases under its multibillion-euro stimulus programmes and began to raise its key interest rates to try to rein in runaway inflation.
News this week that euro zone inflation hit a record 9.1 per cent in August – a multiple of the ECB’s 2 per cent target, and fuelled by soaring energy prices – has prompted a raft of economists to predict the central bank’s governing council will follow up July’s half a percentage point increase to its main rates with an aggressive 0.75 point hike next week.
The Government experienced rising market rates first hand on Thursday when it had to pay a rate of almost 2.22 per cent to sell benchmark bonds, due in 2032, in an auction – the highest price the State has had to offer to get 10-year money since 2014.
Exposed
But the real volatility has been in the near-term debt markets, as every other utterance from a central banker these days is parsed for clues on where rates are headed. ICS, which currently offers only three- to five-year loans in the fixed-rate space, has been the most exposed to this among the non-banks.
By contrast, Finance Ireland, which started mortgage lending in 2018, offers fixed rates for up to 25 years and is known to be writing most of its new business in the 10 to 15-year bracket at the moment. Avant Money, the unit of Spanish banking group Bankinter that entered the Irish mortgage market two years ago, offers fixed rates for up to 30 years.
ICS’s business model is based on borrowing initially from big investment banks to lend to customers, before refinancing pools of loans on the international bond markets through the sale of so-called residential mortgage-backed securities (RMBS).
There has been strong speculation in the market that ICS’s recent move to pull back sharply on new lending was down to it maxing out its banking credit facilities at a time when the RMBS market, while not entirely closed, isn’t exactly inviting.
However, sources say that ICS has about €600 million of lending capacity left over from a €900 million facility – its largest ever – agreed with three international banks a number of months ago. The company is also said to be in talks with overseas pension and insurance firms about opening up a new avenue for financing lending – or what is known as forward flow funding. The Netherlands is the most advanced market in Europe for this type of activity.
Meanwhile, ICS is expected to try to get an RMBS deal away in the final quarter of this year – either in the public markets or through a deal with a small group of private investors – when investors should have a better idea of where central bank rates are headed. A spokesman for the company declined to comment.
However, he said that ICS’s full-year mortgage lending is on track to reach €800 million to €850 million, up from €530 million last year. That would equate to as much as a 6.5 per cent share of the €13 billion of new Irish mortgage lending that bankers and economists expect will be done this year. Market sources say, however, that most of this had already been committed before ICS tightened its criteria.
‘Ongoing volatility’
“Our continued growth is underpinned by prudent management of our loan book and in response to ongoing volatility in the international capital markets, and as well as the evolving interest rate environment, we have introduced a number of changes to our mortgage interest rates and lending policies,” the spokesman said.
ICS’s self-proclaimed conservatism may go down well with its senior lenders and the pension and insurance money it is courting, but it has severely dented its reputation with mortgage brokers
“ICS Mortgages continues to lend actively in both the owner occupier and buy-to-let markets, via the broker and direct lending channels, with a strong pipeline of activity in the fourth quarter of 2022 and beyond.”
ICS’s self-proclaimed conservatism may go down well with its senior lenders and the pension and insurance money it is courting, but it has severely dented its reputation with mortgage brokers. These folks are responsible for about 45 per cent of mortgages being written in the State so far this year, up from a low point of about 14 per cent after the property crash.
It also makes Dilosk, the subject of perennial takeover speculation that went into overdrive earlier this year, a much less attractive target.
The company, led by chief executive and co-founder Fergal McGrath, is understood at least to be on the hunt for fresh investment and 14 per shareholder Chenavari is known to be looking for an exit.
The ideal time would have been a year ago, according to observers, when market funding continued to be ultra cheap, big lenders Ulster Bank and KBC Bank Ireland had signalled they were retrenching from the Republic and ICS was providing real competition.
