Irish mortgage rates will rebound back towards their status as the euro area’s dearest this year as the effect of pressure from savers mounts on banks, ratings agency DBRS has warned.
ast year Irish banks were under less pressure than European peers to hike prices even as the European Central Bank (ECB) dramatically raised interest rates because mortgage lending here is overwhelmingly funded by savers, unlike the rest of Europe – but zero-return savings are not expected to persist through 2023.
The 2022 factor that saw Irish mortgages fall from their long-time status as most expensive in the euro area but it won’t last, DBRS said.
“Despite all these specific features in the Irish banking sector, we believe this is a transitional situation that should revert throughout 2023, when banks return to paying deposits more to compensate for expensive wholesale funding costs and the exit of Ulster Bank and KBC has been fully implemented.”
Since July last year the ECB has increased its interest rates five times bringing them to 3pc from 0pc, and at the same time this has re-priced the cost to banks of accessing funds through a mechanism known as targeted longer-term refinancing operations (TLTROs).
As a result, most European banks saw funding costs increase dramatically over a few months and passed on the new cost to borrowers with variable rate loans as well as new lending at fixed rates.
Ireland bucked the trend and at the same time the mortgage market here has grown ahead of peers thanks to demand for new homes and switching.
Analysts at DBRS say the cost of mortgage debt for borrowers here increased only marginally (0.12pc) in 2022 compared with hikes ranging from 0.95pc in France to 2.49pc Portugal.
Irish banks’ higher reliance for funding on savings is cited as key drivers of the now relatively cheaper Irish mortgages
It means Ireland is no longer the most expensive mortgage market in Europe, having come into 2022 with a much higher rate than most of its European peers.
Irish banks’ higher reliance for funding on savings is cited as key drivers of the now relatively cheaper Irish mortgages.
Irish banks’ major source of funding is deposits, which represents 80.38pc of their total funding ratio, compared with a European average of 69.65pc.
Irish banks’ loan-to-deposit ratio was 70.9pc at the end of the third quarter of 2022 versus a European average of 104.8pc – meaning lenders have fully funded their loan portfolio with deposits that are still mostly priced at 0pc and which have provided a cushion for both banks and borrowers.
Banks elsewhere in Europe and non-banks here utilise more wholesale funding sources, which have dramatically increased in cost since July and have therefore had to pass on a bigger hit to mortgage borrowers.
Some pressure from new fintech entrants like Avant Money as well as the current push by the remaining Irish banks to grow their customer numbers as Ulster Bank, whose CEO is Jane Howard, and KBC Bank Ireland quit the market has also helped to keep a lid on prices including availability of popular fixed rate deals, DBRS believes.
However, analysts believe those factors are set to fade.