Fergal McGrath, CEO of Dilosk which owns ICS Mortgages, was among the thousands who gathered in Barcelona this week for a global meeting of asset-backed bond traders and investors, which included those interested in residential mortgage-backed securities (RMBS), an area of the bond market worth trillions of euros. Participants here typically raise funds for new mortgages by refinancing existing loan bundles.
McGrath, who had 25 meetings over two days, felt that the atmosphere at this year’s annual conference compared favourably to the last two years. The 2022 event had followed the onset of the Ukraine conflict, which fuelled rampant views about the European Central Bank (ECB) lagging in interest rate hikes to curb inflation. Such sentiments persisted into the subsequent year, causing significant fluctuations and turmoil in the RMBS market.
However, the ECB finally boosted its main lending rate from zero to a record 4.5 percent over a 15-month period, culminating in September. Notably, it also recently embarked on rate cuts, slashing official rates by a quarter percentage point on Thursday, a maneuver anticipated by many despite ECB President, Christine Lagarde, declining to give details on further reductions.
The general perspective that rates have peaked and would now continue to decline has provided a steadier climate for investors, according to McGrath, which also benefits ICS. So far this year, ICS’s parent firm has successfully sold €900 million worth of mortgage-backed bonds in two offerings to investors, with pricing conditions favourably evolving across the two transactions. Consequently, ICS has reopened its services for owner-occupier borrowers who were previously limited due to stringent market constraints that led to rate hikes and the implementation of the strictest borrowing criteria, based on borrowers’ income.
Last week saw ICS cut some of its fixed rates by half a percentage point, reducing its five-year rate on loans up to 80 percent of a property’s value down to 5 percent. Although this doesn’t put ICS at the forefront of the market in terms of competitive prices, it does bring them a step closer.
McGrath has revealed that there has been a surge in applications following an announcement a few weeks back. Boosting demand are new measures, such as extending repayment options to borrowers till they turn 80, given they can display enough retirement income, and enabling the calculation of public sector employees’ income as three levels high up the pay scale.
A newly introduced nonbank lender to the field is Nua Money, supported by the Wexford-based Allen beef tycoons. This company has earned a licence from the Central Bank and aims to commence loan operations through a pilot group of 10 brokers near the end of June. Cofounders of the firm are bond market experts Fergal O’Leary and Mark Watson. The firm is reported to be nearing the finalisation of a wholesale funding line from a prominent international bank and will likely diversify financing as time progresses. Former owners of beef processing company Slaney Foods in Wexford, Bert and Lance Allen, bought into Nua Money last summer, obtaining a 40% stake for €4 million.
Nua Money’s Chief Executive, Mark Watson, stated his belief in the presence of a structural advantage in the Irish mortgage market, given Ireland’s robust GDP growth, growing young population, low unemployment rate, and a structural shortage in housing. He also mentioned that the mortgage lending limits set by the Central Bank around a decade ago provide the market with stability.
An additional new player in the market, an Austrian bank-owned start-up named MoCo, has recently hit the €100 million mark in mortgage approvals, according to those in the industry.
Neither the newer nonbank lenders nor those striving for revival claim to, or intend to, offer the best market rates. This, however, might change as official, wholesale, and capital market borrowing costs decrease, per mortgage brokers.
This resurfacing of nonbank lenders coincides with 80,000 homeowners transitioning from fixed rates this year, as reported by Brokers Ireland. These homeowners were previously shielded from the recent rates surge.
Mortgage switching in the market exhibited signs of resurgence in April, experiencing a 24% year-on-year increment from a relatively low starting point, reaching €90 million. The spike in mortgage switching activity in 2022 subsequently led to a 14% decrease in total market drawdowns, diminishing to €14.1 billion.
Nonbank mortgage lenders once again found a footing in the market, according to Trevor Grant of Affinity Mortgages and chairman for the Association of Irish Mortgage Advisors. Unlike traditional banks, these nonbank entities often provide greater flexibility with atypical situations.
Emerging players in the market offer unique advantages, primarily centred around exploiting technology to expedite and simplify the loan process. Among the loan products Nua intends to introduce include mortgage options customised to relocated foreign employees, debt consolidation mortgages, equity release loans, and regular home loans.
However, observers argue that nonbanks, which achieved a market share of up to 20% of Irish mortgage activity from nil in four years up to early 2022 before backing down due to inflated funding expenses, have a considerable challenge regaining their former position. Diarmaid Sheridan, a Davy analyst and part of the Bank of Ireland unit, pointed out that service quality and cost continue as key considerations for borrowers. As mortgages require considerable investments in a platform to be justified, banks’ funding advantage remains apparent, thus presumably remaining the principal lending source.
Finance Ireland, the largest nonbank lender in the country, spearheaded the primary wave of nonbank lenders entering the Irish mortgage market post-property boom, beginning to provide loans to homeowners towards the close of 2018. Meanwhile, Dilosk acquired ICS from Bank of Ireland in 2014 to originally focus on buy-to-let loans but expanded into private housing space in 2019. In contrast, Avant Money, a Bankinter subsidiary, introduced the most affordable mortgages in the country during autumn 2020, offering fixed rates of 1.95% for a period extending to seven years.
According to a research paper published by the Central Bank in April, nonbank lenders played a crucial role in reducing interest rates from 2019 to 2022. Assisted by the ultra-low rates in the wholesale and bond markets, these entities had an advantage over banks as they didn’t have to retain large amounts of costly capital to safeguard against potential loan defaults.
However, the trend made a swift turn when the European Central Bank (ECB) began increasing rates in 2022. The research piece highlighted that nonbank lending has a higher susceptibility to financial conditions and is swiftly affected by shifts in monetary policy.
Within six months following the ECB’s decision to increase interest rates, fresh rates from non-banks, previously focused on fixed-rate products, soared from 2% to 3.3%, a noticeable increase when compared to a mere 0.1% increase from banks.
Banks gained a competitive edge due to their capacity to fund their loans from affordable deposits. With each of the remaining three Irish banks offering savers 3% interest on select products while virtually 90% of consumers’ funds are in on-demand and current accounts earning negligible interest, they succeeded in shielding mortgage borrowers from the full impact of ECB’s interest rate increases.
The Central Bank boasts excess deposits of about €60 billion between its two largest banks, an amount which draws interest at the ECB deposit rate reduced by 0.25% to 3.75% as of Thursday. This comes in stark contrast to the ECB’s policy two years earlier, which imposed a 0.5% charge on banks for their surplus funds under a negative rates policy initiated in 2014.
Since the volume of the Irish banks’ deposits exceeds their loans, their mortgage rate increases fall behind the average euro-zone bank. The Bank of Ireland’s chairman, Patrick Kennedy, stated at the business’s annual general meeting fortnight ago that less than 40% of the ECB rate increases had been applied to fixed-rate products, in an attempt to find a middle ground between raising rates for both savers and borrowers.
This raises concerns about how successfully banks have been able to implement the monetary policy of the central bank recently. The primary objective of official rate increases is to promote saving, curb lending and control inflation.
The Bank of Ireland, Allied Irish Banks (AIB), and Permanent TSB (PTSB) represented a staggering 93% of fresh mortgage lending in the past year, a dominance further solidified by Ulster Bank and KBC Bank Ireland’s market departures.
Among nonbank lending entities, Avant Money has been the most dynamic player in the Irish sector. This is partly because of its backing by a conventional bank, with its parent company, Bankinter, articulating plans in May to convert Avant Money into a full-fledged international bank branch.
In the meantime, Bawag procured MoCo for a token €35 in March 2023, with the start-up previously supported by Dutch commercial bank NIBC. MoCo communicated to its initial investors, such as ex-AIB chairman Lochlann Quinn, ex-DAA and Aryzta chief Kevin Toland, Smurfit Kappa CEO Tony Smurfit, and ex-Green Reit CEO Pat Gunne, that NIBC had opted against financing Irish mortgages due to resentment over the “continuing irrational pricing” by leading Irish banks.
A Bawag spokesman opted not to discuss the pricing tactics of mainstream financial institutions this week. Instead, he expressed confidence in the Irish market and its promising long-term macro-economic fundamentals. The current MoCo team is cooperating with a selection of over 20 independent brokers to establish formidable relationships and exemplary service.
Contrastingly, Finance Ireland, the original nonbank mortgage lender post-recovery, is still inactive in this area. Their five-year fixed mortgage rate, for example, is 6% for loans less than 80% of property value. The same product stands at 3.8% via Avant. The lowest five-year rate available is 3.55% from AIB for dwellings with superior energy efficiency ratings. Meanwhile, Finance Ireland remains operational in other sectors such as auto financing, lending to SMEs, and agri-financing.
Revolut, a UK-rooted fintech firm that carries out its operations in the Republic under a Lithuanian banking licence, has intrigued both financial advisors and potential borrowers regarding its impending mortgage plans. Last autumn, the digital bank confirmed its aim to become part of the mortgage sector in the Republic, where the company provides services to more than 2.8 million subscribers.
Maurice Murphy, the head of Revolut in Ireland, revealed to the Business Post during an interview in April that the progression of this platform is nearing its conclusion. According to the report, it is anticipated that Revolut’s mortgage product will initially be launched in Lithuania, with a subsequent rollout in Ireland.
However, when queried about the timeline by The Irish Times, a Revolut representative sidestepped the question, merely stating that they are in progress, with no further details to reveal at this point.