Competition or the potential lack of it in the Irish mortgage market has been a hot topic of discussion over the last 18 months since the announcements by Ulster Bank and KBC Bank that they were planning to exit the Irish market. Collectively, they made up a quarter of new mortgage lending in Ireland in recent years and had emerged as the main competitors to the Irish pillar banks of AIB, Bank of Ireland and Permanent TSB post the financial crisis.
The “non-bank” lenders of ICS/Dilosk, Finance Ireland and Avant Money, which launched mortgage products in Ireland in September 2020, had ensured eight options were available to mortgage customers before the Ulster and KBC announcements.
As these two progress their exit plans and the sale of loan books to the pillar banks, the remaining six lenders powered on through the pandemic with new mortgage lending topping €10.5 billion in 2021, the highest since 2008. This growth was characterised by intensified competition as the non-bank lenders, which distribute primarily through brokers, introduced historically low rates below 2 per cent. The banks responded with rate discounts for more energy-efficient properties and high-value loans while retaining attractive cashback offerings.
Switching levels have also exploded as existing mortgage holders rushed to access the historically low rates on offer in advance of any changes to European Central Bank rates.
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Events of 2022 have changed the competitive dynamic somewhat. A post-Covid economic bounce, the war in Ukraine and the volume of liquidity pumped into markets during the pandemic saw inflation rise sharply. This prompted Central Banks to take action on interest rates, with the ECB announcing an increase of half a percentage point on its main refinancing rate in July, signposting further increases before the end of the year.
While the pillar banks absorbed the first ECB increase, we can expect further increases to trigger upward movements in fixed and variable rates
So what lies ahead for the Irish mortgage market and consumers?
The direction of travel for mortgage rates in the short to medium term is clear. A sizeable increase by the ECB is expected on September 8th and further increases before the end of the year. While the pillar banks absorbed the first ECB increase, we can expect these further increases to trigger upward movements in fixed and variable rates.
Non-bank lenders are funded through the markets, which leaves them more exposed to rising market rates. They have already moved. ICS/Dilosk announced tight restrictions on lending until financial markets normalise and last week increased variable rates. Avant Money, which has offered the lowest rates in the market since its launch in 2020, raised its main fixed rates by between 0.3 and 0.7 of a percentage point.
This upward trend on mortgage rates will continue to track ECB increases over the coming months, meaning higher borrowing costs for consumers.
While the trajectory for mortgage rates in the short to medium term is clear, the degree of competition and ultimately choice for consumers is less so.
Ulster Bank and KBC have ceased new lending and are expected to exit the market in 2023. The addition of their loan books will strengthen the balance sheets of the three pillar banks. The Central Bank Financial Stability Note in May highlighted the role of non-bank lenders in enhancing competition on interest rates for consumers. They now account for 13 per cent of new mortgage lending in Ireland.
Considering the high-profile exits from the market, it is critical that the non-bank lenders continue to thrive. The commitment from Bank of Ireland to provide €1 billion in funding to non-bank lenders as part of the Competition and Consumer Protection Commission approval to acquire KBC will help.
While fewer lenders in the market ultimately means less choice in the short term, the continued emergence of non-bank lenders and arrival of new entrants in the medium term would facilitate a functioning mortgage market that delivers more options for consumers.
Recent speculation on the potential entry of new lenders is encouraging, though none has yet come to pass. Citizen Finance, which operates in the Irish consumer finance space, was considering mortgage lending but this is now reported to be unlikely. British digital player Starling Bank was another considering a move but decided to focus on markets that offer better returns. An Post has previously declared its intention to enter the market while MoCo and Nua Money are others believed to be seeking Central Bank authorisation.
Consumers can expect to see at least two new lenders enter the market in 2023
The exit of Ulster Bank and KBC provides an opportunity for more non-bank players, with lower operating and distribution costs than banks, to enter a market projected to grow to €15 billion in new lending by 2025. Consumers can expect to see at least two new lenders enter the market in 2023.
The Retail Banking Review being conducted by the Department of Finance is due to report in November. It is assessing competition in the mortgage market, the need to make it more attractive to new entrants and how to improve consumer choice. The review gives the Government an opportunity to implement policy initiatives that ensure a fit-for-purpose mortgage market that delivers consumer choice.
The launch of initiatives such as the €400 million First Home shared equity scheme in July provides another option for mortgage customers but more is needed.
Shane Quinlan is managing director of Sherry FitzGerald Financial Services.