ICS Mortgages, which was among a small group of non-bank lenders to push into the Irish owner-occupier loans market in recent years to take on the declining number of mainstream banks with competitive rates, surprised the market on Monday by unveiling the first set of Irish interest rate increases in years.
The lender, owned by a company called Dilosk, which acquired the ICS brand from Bank of Ireland in the wake of the financial crisis, said it was increasing borrowing across its three- and five-year fixed-rate products by 0.2-0.45 percentage points.
It comes less than eight months after ICS cut rates across the board, including the setting of a 1.95 per cent fixed rate to match the then-lowest mortgage price in the market, offered by another non-bank lender, Avant Money.
The preferential rate by both lenders was aimed at borrowers with high levels of equity in their homes. ICS’s previous 1.95 per cent rate has now jumped 2.25 per cent for a three-year loan, and 2.4 per cent for a five-year one.
Fixed-rate mortgages have been the most competitive space across the industry in recent times, accounting for about 80 per cent of all new home loans written last year.
So, why are ICS rates going up?
The main reason is down to the fact that ICS funds itself ultimately on the international capital – or bond – markets.
Market interest rates – or what more commonly referred to as yields by bond traders – have been rising in recent times for two reasons.
First, the European Central Bank (ECB) is winding down bond-buying programmes that have kept euro zone market rates down for years.
Second, expectations are growing that the ECB will start raising its main interest rate later this year.
The rate has remained at zero for the past six years (while the rate the ECB charges banks for storing their excess deposits has been in negative territory since 2014).
Although there had been speculation in recent weeks that economic uncertainty caused by the war in Ukraine may encourage the ECB to be cautious about taking away the punch bowl, its president, Christine Lagarde, made it clear last week that the bank is more concerned about taking action to tackling soaring inflation.
Anyone who has filled a car tank in the past few weeks knows only too well what the conflict in eastern Europe has done to fuel pricing.
Where are ECB rates headed?
Financial markets are now pricing the guts of 0.5 percentage points worth of ECB interest rate hikes by the end of this year. Elsewhere, the US Federal Reserve is on track to increase rates on Wednesday for the first time in three years, while the Bank of England is tipped to push through a third rate hike in four months on Thursday.
Most of the upward pressure for borrowers in the international money markets has been in the pricing of three- to five-year funds.
But longer-term rates are also rising. For example, the yield on 10-year Irish Government bonds pushed above the 1 per cent level this week, compared with a rate of 0.0038 per cent three months ago.
Will other mortgage providers follow ICS with rate increases?
Trevor Grant, a director of mortgage broker Affinity Mortgages and chairman of the Association of Irish Mortgage Advisors, says there has been "a lot of talk in recent months" about the prospect of lenders across the board raising rates by the year end.
However, the ICS move has come sooner than observers had expected, he said.
“Are the others watching? Yes. Lenders are there to make money,” he said. “Of course, ICS continues to offer among the cheapest rates in the market, even after the move. But if somebody goes first, that encourages others.”
For Karl Deeter, a mortgages expert and founder of onlineapplication.ie, a software system used by many of the largest brokers in the State, it's too early to call if ICS's move is the beginning of a wider trend.
“There are upward forces in market rates and lenders have to respond to that where they are in the market [for funding],” he said.
The mainstream banks, unlike non-bank lenders, are mainly funded these days by customer deposits, which are generating nothing for savers at best. The pricing of deposits will remain at zero – or below – long after the ECB starts hiking rates again.
It’s hard, therefore, to see mainstream banks justifying rate increases until the ECB moves on its main rate, according to observers. Tracker mortgages, of course, move automatically with ECB rate changes.
Bank of Ireland sent a signal on Tuesday by unveiling the new lowest mortgage price in the State: a 1.9 per cent rate on a four-year so-called green mortgage of at least €300,000.
It marked a 0.1 point decrease on the previous rate. The bank has also cut its standard high-value mortgage rate.
Such changes would have been in the works for some time. But the timing is interesting, nonetheless.
Are any other lenders talking about future rate moves?
No. And with good reason. It’d likely prompt a Consumer and Protection Commission investigation if banks started signalling rate moves in advance of decisions.
But, according to Grant of Affinity, official rates seem to be heading in one direction over the medium term.
“It may make sense, therefore, for people to look at this stage at getting a long-term fixed rate,” he said.
“You can still fix for 10 years at rates of as low as 2.4 per cent [per annum].”
