It's probably no surprise to hear that mortgage rates in Ireland are higher than almost every other country in the Eurozone. So are we all being ripped off by the banks or is there more to it?
Latest figures from the Central Bank show that the average interest rate on a new mortgage in Ireland was 2.79% in January. Although low for Ireland by historical standards, and a drop from 2.92% the year before, this compares to an average rate of 1.29% across the Eurozone and a rate of less than 1.00% in Finland - a country with a similar population to us.
To put this into perspective, according to the Banking & Payments Federation Ireland (BPFI), the average first-time buyer mortgage is now around €250,000. This means a typical first-time buyer who’s borrowing that amount over 30 years will pay almost €190 a month more for their mortgage compared to the Eurozone average, or almost €2,300 a year.
So why are we paying more?
1. Home repossessions
The level of home repossessions in Ireland is very low by international standards. In some European countries a bank will take back ownership of a property within the space of a year or so if the loan isn't being repaid.
This isn't the case in Ireland where the number of repossessions, even in cases where the mortgage has been in arrears for years, remains negligible due to the length and complexity of the process and the legal and political impediments faced by banks.
For example, according to a report commissioned by the BPFI, the process takes on average 3.7 years in Ireland, the sixth longest in the EU, and compares to less than one year in Denmark and the Netherlands, which coincidentally have among the lowest rates in the Eurozone. However in some cases the process can drag on for even longer with some mortgage holders in Ireland not repaying anything for many years. Something you wouldn't get away with in countries with lower rates.
For example, according to the Central Bank, excluding buy-to-let properties, as of December 2020 in Ireland: 8,926 mortgages were in arrears by between two and five years, 10,789 were in arrears by between five and 10 years, while a staggering 5,266 were in arrears greater than 10 years.
And while some people might feel a light touch approach is the right approach to take towards people who get into financial difficulty, it does mean mortgage lending is far riskier in Ireland than in other European countries and therefore the interest rate we're charged is higher.
It also means fewer banks are interested in doing business here. Which brings us on to our next point...
2. Lack of competition
There is still a lack of competition in the Irish mortgage market as it remains heavily concentrated in the hands of a few main banks; mainly AIB and Bank of Ireland. Mario Draghi, the former head of the European Central Bank (ECB) even once referred to it as a ‘quasi-monopoly’.
And although competition in the market has heated up in recent times, particularly with the arrival of Avant Money, it's still below where it should be and this has led to higher rates.
More competition would help bring down rates, but there’s anecdotal evidence that some foreign lenders are being put off entering Ireland due to the riskier nature of lending here and the aforementioned issues around repossessions.
This key issue around risk and repossessions also leads us to our next point...
3. Irish banks must hold excess capital
Holding capital, such as cash, means a bank has assets which can absorb losses if a recession hits and people can't repay their loans.
A lack of capital was a big reason Irish banks got into so much trouble during the 2008 financial crash, so regulators like the ECB now police banks more heavily to ensure lenders set aside enough capital against their loans, with riskier loans needing more capital.
Because of the last crash, banks in Ireland still have a large number of loans on their books which are either in arrears or are not being repaid at all (often referred to as non-performing loans). In fact the level of non-performing loans with Irish banks is way in excess of what you'd find in other European countries. And we already know that a bank will have difficulty repossessing a property in Ireland if the loan isn't performing.
So what this means is that banks here have to set aside far greater levels of capital than banks in Europe because lending here is more risky. Indeed banks in Ireland need to hold around three times the amount of capital as the European average, according to a report in 2019 by Goodbody stockbrokers. Put another way, Irish banks must hold €50 of capital for every €1,000 of mortgage lending versus just €16 in Europe and the UK.
Holding all this capital in reserve means banks have less money to reduce interest rates or even spend on things like IT infrastructure.
Back in February when Ulster Bank announced it was exiting the Republic after 160 years, the requirement to hold excess capital and not being able to return any of that money to shareholders was cited as a major reason for its shock decision.
4. We’re not comparing like-with-like
As mentioned previously recent data from the Central Bank shows that the average mortgage rate in the Eurozone was 1.29% in January.
However the average APRC (annual percentage rate of charge), which includes any set-up fees or administration charges that have to be paid by borrowers, and which are common in many European countries, is about 30 basis points higher at 1.59% or so. In reality, this should be the interest rate against which Irish rates are compared.
So what extra mortgage fees do banks charge here?
In general none.
Irish banks might charge a high rate of interest but they charge few (or none) of the set-up and admin fees that banks in other countries commonly charge.
5. Cashback offers
Permanent TSB offers 2%, ESB and Bank of Ireland offer up to 3% cashback, while Ulster Bank will offer €1,500 towards your legal fees.
These cashback offers obviously cost the banks money. For example a €300,000 mortgage would get you up to €9,000 cash with Bank of Ireland or EBS after five years.
These types of incentives are not available in most other European countries and, were they not available in Ireland, would probably lead to slightly lower headline rates. Indeed it’s telling that the lenders which offer the lowest rates in Ireland (Avant Money and KBC) offer little or nothing in the form of cashback incentives.
When you factor in the cashback costs as well as the extra fee income many European banks generate through set-up and admin fees, Irish mortgage rates, although still high, are closer to the Eurozone average than the headline figures suggest.
6. Tracker mortgages
Irish banks also have a large number of tracker mortgages on their books, which were popular during the days of the boom.
Before the recession, banks could access money more cheaply and could survive on the 0.5% to 1% margin many trackers work off.
However in today’s climate these mortgages make far less money for the banks, so they’re recouping their losses by charging new customers higher rates.
However claims by some that trackers are actually loss-making for banks appear wide of the mark.
7. Market size
Ireland is a small country. Compared to France or Germany there is a far smaller mortgage market so lenders here don’t have the same economies of scale as elsewhere. This impacts on the rates we're charged too, but probably not as much as the issues above.
The bottom line
Nobody is denying that mortgage rates in Ireland are above the European average. However, when you look at the particulars of the Irish mortgage market you can see why this is the case. And by many business metrics, such as looking at the return on equity (ROE), the level of profits Irish banks are generating at present are average at best. Indeed Ulster Bank is considering leaving the Irish market altogether because it can't generate enough profit here.
Also, while AIB and Bank of Ireland have been slow to reduce their rates, both KBC and Avant Money have slashed theirs well below the 2.79% average. In fact Avant Money has a rate of 1.95% for those with a 40% deposit. So it's not all bad news.
Switch and save
Although rates are high in Ireland it doesn't mean there isn't value to be found.
If you’re a first-time buyer who’s at the start of the mortgage journey, make sure you do your research and shop around before applying for a mortgage. There’s now a large variation in interest rates and cashback incentives across all the different lenders so find out who’s offering the best deal for you.
And if you already have a mortgage, then look into switching. In recent times Irish mortgage holders have been reluctant to switch, which is crazy seeing as you could save up to €300 a month by switching.
Many lenders now have dedicated switch teams in place to make the process as easy as possible so it often won’t be as much hassle as you think it might. And while there are costs associated with switching mortgage, in many cases banks will provide a cashback incentive to those who switch or a contribution towards the legal fees.
Use our free mortgage calculator to easily compare the different interest rates and offers from all the lenders in Ireland right now.