It should be no surprise to hear that mortgage rates in Ireland are higher than almost any other country in the Eurozone. So are we all just 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 is 3.01%. Although low for Ireland by historical standards, and a drop from 3.21% in July 2018, this compares to an average rate of 1.78% 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, the average first-time buyer mortgage is now around €225,000. This means a typical first-time buyer who’s borrowing that amount over 30 years will pay almost €143 a month more for their mortgage compared to the Eurozone average, or over €1,700 a year.
So why are we paying more?
1. Home repossessions
The level of home repossessions in Ireland is incredibly low by international standards. In most European countries a bank will take back ownership of a property within the space of a year or so if the loan has gone bad.
This isn't the case in Ireland where the number of repossessions, even in cases where the mortgage hasn't been repaid in years, remains negligible due to the length and complexity of the process and the legal and political impediments faced by banks
The recent events in Roscommon are a case in point.
And while some people might feel that this is 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, Bank of Ireland, and to a lesser extent Ulster Bank. Mario Draghi, the head of the European Central Bank (ECB) even recently referred to it as a ‘quasi-monopoly’.
And although competition in the market has heated up in recent times, it's still below where it should be and this has lead to higher rates.
More competition would help bring down rates, but there’s anecdotal evidence that 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 repossssions 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 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 recession, banks in Ireland 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 execess 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 recent report 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 generate profits elsewhere so this puts pressure on them to have higher mortgage rates and higher margins.
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 1.78% 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 2.11%. 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 lower headline rates. Indeed it’s telling that the two banks which offer the lowest rates in Ireland (Ulster Bank and KBC) offer little or nothing in the form of cashback incentives.
According to the same report by Goodbody stockbrokers, Irish mortgage rates are 1.7 times the Eurozone average. But when you factor in the cashback costs as well as the extra fee income many European banks generate through set-up and admin fees, this falls to 1.25 times the average.
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.
Also, while AIB and Bank of Ireland have been slow to reduce their rates, both KBC and Ulster Bank have slashed theirs well below the 3.03% average - as low as 2.30% in the case of Ulster Bank. 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.