The mortgage market has changed beyond all recognition in recent weeks. With one foreign lender already in the market, and perhaps more to come, lenders are now really competing with each other. Rates are at levels no one would have thought possible a short while ago but the biggest changes may be yet to come.

The step up in competition is going to put serious pressure on the smaller lenders. Many are likely to be bought out and it is possible that only the biggest lenders will be on the scene in a year or two. Irish Life and Permanent chief executive David Went warned earlier this week that life will become difficult for many of the lenders. "It is clear that some of the institutions will find it difficult to live with these sorts of margins and it is clear there will be a shake out. I don't know how many will be involved in the shake out."

According to Mr Went, any mortgage lender with less than 5 to 10 per cent of the market will find it very difficult and even those with mid-teens market share and high costs will find it very difficult.

This effectively means every Irish mortgage lender with the exception of AIB, Bank of Ireland, EBS and Irish Life and Permanent.

Bank of Ireland (including ICS), Irish Life and Permanent, and EBS took about 19 per cent each in net lending last year. AIB was just below that at just over 14 per cent. First Active and Irish Life Homeloans come next with about 10 per cent each. These two are seen as possibly being in difficulties with First Active under pressure to cut costs.

Observers say it could be worth watching Irish Life Homeloans, which Irish Intercontinental bank bought earlier this year. Germany's Creditbank owns IIB and could use it to launch an attack on the Irish market. This would be the second major foreigner in the market. Through its German operation, Creditbank has access to the so-called mortgage bond market, the Pfandbrife. These specialised bonds allow institutions access to extremely cheap money and would provide another level of competition in the market. All the other lenders, including TSB, ACC, Irish Nationwide, National Irish Bank and Ulster Bank, only had about 10 per cent between them. There is already speculation that Irish Nationwide could merge with EBS, creating a much larger society. EBS has a firm commitment to mutuality and leading the market with the lowest rates and thus it could prove attractive to Irish Nationwide's members.

It is still too early to say what is likely to happen to the other smaller lenders, although they will certainly all be looking carefully at their positions.

ALTERNATIVELY, the institutions could decide to meet additional funding costs by reducing operating costs. Cost-income ratios are relatively high at many Irish financial institutions, making it difficult to compete effectively with low-cost suppliers. Finding new ways of doing business and using technology more effectively will become increasingly important as competition intensifies in different product areas.

Another alternative is increasing the volume of mortgages sold: when margins are smaller, an institution can protect profits by selling more products.

All this should generally be good news for mortgage holders. However, if competition pushes out some of the smaller, more competitive players, it could be dominated by larger banks who would then carve it up between themselves, perhaps again widening the margins they take.