Switching rate increases for mortgage borrowers at non-lending service firms

Homeowners whose mortgages are with “non-lending firms” have gradually increased their rate of switching. The rate at which they are moving their loans away from these non-bank servicers in recent months has been higher than the rate at which mortgages have been switched away from retail banks.

This is one of the findings of a new paper published by the Central Bank and exploring the extent to which borrowers at non-lending servicer firms – companies that service a portfolio of mortgages but do not issue new ones – have been able to switch.

Mortgage switching in the Irish market rose to a historical peak between 2006 and 2008, a phase of “intense mortgage market competition” before the banking crash, the paper outlines.

In late 2022, switching rates again increased sharply to levels last seen in 2004 as borrowers moved from variable- to fixed-rate loans in anticipation of further interest rate rises from the European Central Bank (ECB). However, this switching activity remained below its 2006-2008 peak.

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Data from the Central Credit Register shows that customers of banks were more likely to switch mortgage lenders than customers of non-lending servicer firms between 2017 and early 2023.

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The most likely reason for the difference was the lower average credit quality of customers of non-lending firms, which makes it more difficult for the borrower to meet the credit standards of the new mortgage lender, the authors state.

But switching away from non-lending firms increased gradually in 2022 and 2023, despite the rise in mortgage interest rates across the market.

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This may have been prompted by the desire of customers on high average interest rates to avail of potential savings by switching even as market interest rates rose. It also coincided with a period of “heightened public scrutiny” and Central Bank supervisory attention to the capacity of non-lending firms’ customers to switch to banks.

The Central Bank concluded last year that there was “no blanket impediment or barrier” in place to borrowers switching out from non-lending servicer firms, despite their lower switching rate.

The authors of the paper, Edward Gaffney and Fergal McCann, say their assessment of the Central Credit Register evidence supports this finding because, although high-risk and medium-risk portfolios show “very low” switching rates, low-risk portfolios have seen their switching rate rise since mid-2022.

“In recent months, the switching rate away from non-lending services with a low-risk profile was higher than that for customers of retail banks,” they write.

[ Banks warn of pressure to cut mortgage rates following ECB interest rate cut ]

The Central Credit Register data also confirms that banks were the predominant destination for more than 90 per cent of all mortgage switchers between 2017 and 2019, receiving 90 per cent of all switchers. The share of switchers who moved to non-bank lenders surged from 20 per cent at the end of 2020 to 60 per cent in mid-2022. These include lenders such as Finance Ireland, Avant Money and ICS Mortgages.

Another study on the subject of mortgage switching published by the Central Bank earlier this year also highlighted how non-bank lenders were “leaders” in the interest rate cycle, by competing heavily on interest rates. But this activity is cyclical. After the mid-2022 increases in ECB interest rates, non-bank lenders were the destination for fewer than 10 per cent of switches.

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“Our findings are in line with international research which shows that non-banks lend more during periods of loose financial conditions and tighten credit more rapidly in periods of tight financial conditions, because they typically rely on volatile and cyclical forms of market funding due to a lack of insured deposits.”

The Central Credit Register data also shows that, in recent months, credit unions have begun to account for “a small but growing share” of mortgage switches. From a position of having been close to absent from the mortgage-switching market up to late 2022, about 10 per cent of mortgage switches were to credit unions by the end of 2023.

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