bonkers.ie Looks Closer: The Irish Mortgage Market
In this episode of the bonkers.ie Looks Closer podcast series we chat to Gerry Hiney, Managing Director of Park Financial Planning and switchmymortgage.ie, to talk about the Irish mortgage market, how Covid-19 is affecting things, and whether Avant Money’s entry into the mortgage market is going to shake things up and lead to lower rates for consumers.
Tell us a bit about yourself, Gerry
Park Financial Planning is a mortgage broker that was established 20 years ago.
We do buy-to-let mortgages, commercial mortgages, but we mainly focus on residential mortgages. This includes first-time buyers, movers, switchers and we also provide a service for people who would have difficulty with mortgages.
Prior to setting up the company, I worked in Permanent TSB where I was a manager in their head office on O’Connell Street for a long time which is where I gained a lot of my knowledge and experience of the mortgage market.
Why are mortgage rates in Ireland so high?
There are valid reasons why mortgage rates are quite high at the moment. We have some very good rates now compared to historic rates.
The main reason rates here are so high is because of the difficulty banks have in enforcing security. Unlike other countries, it takes an age for a bank to repossess a property and make provisions for losses in Ireland. In other countries, properties can be repossessed within three to six months.
After the last crisis, there was a considerable amount of customers who had to default on their mortgages. Banks suffered losses and they have to make provisions for those losses. Going forward, they have to continue to do that.
There is scope for rates to decrease. The interesting thing is that one lender, Ulster Bank, decreased its rate to 2.2% on a five year fixed rate approximately two or three months ago and none of the other lenders reacted to that.
Why did the market not react?
The market is so diverse. You have first-time buyers, movers, etc. What a lot of lenders do is instead of attracting customers by having a low rate, they create niche features with their products. Their main objective is to generate as much profit as possible.
There are restrictions, particularly around the enforcement issue. The banks probably wanted to see what impact their not reacting would have on the market. It hasn’t had much impact and Ulster Bank doesn’t have a huge section of the market because of that product.
Maybe the banks are willing to suffer short term loss of business on a minor scale.
What are average rates?
The average mortgage rate in the Eurozone is around 1.4%.
The variable rates at the moment are exceptionally high. The cheapest variable rate, depending on your loan to value ratio, would be in the region of about 2.75%.
Other lenders have more attractive 3-year fixed rates of 2.3-2.5% rates.
The difference between the variable and the fixed rate means that people will go for the cheaper option with the stability of repayments. Knowing the repayment isn’t going to change is obviously a major factor in why people would go for those rates.
Should people consider fixed rates over variable rates?
Yes. In the past, you’d pay a premium to go on a fixed rate as it would’ve been around 0.5% more expensive than the variable. However because ECB is at zero, there’s very little scope for variable rates to go down further. It’s just competition that will bring variable rates down.
If a customer can get an average variable rate of 2.95-3% or a fixed rate of 2.2%, they will always choose the fixed rate. It’s much cheaper and allows customers to budget for that period of time, knowing that under no circumstances will the repayment change.
Due to the competition that’s coming in, those fixed rates will likely drop further.
Take a look at our guide on the pros and cons of variable and fixed-rate mortgages to learn more about both.
What is Avant Money offering?
Avant Money is a subsidiary of AvantCard. The company is owned by a Spanish bank called Bankinter. AvantCard has decided to enter the mortgage market, trading as Avant Money.
Avant Money’s objective is to develop a niche product. If they don’t, they won’t be able to compete with the big lenders. Avant Money will be the first lender to have a rate below 2% in the Irish market and will undercut competitors.
There’ll be no-frills, it will simply be that they have the lowest rate. It will be interesting to see how the banks react to this.
When will Avant Money enter the market?
The launch is expected in mid-September and Avant Money has chosen a panel of 20 brokers to lead it. It will then gauge how that goes and increase the broker market. Avant Money will probably have a long-term objective of being able to sell mortgages themselves.
Avant Money will focus initially on the main markets in urban areas, such as Dublin, Cork, Limerick and Waterford.
The lender will likely be fairly particular about requirements and underwriting at first. It seems as though if someone wants to take out a mortgage for 90% of the value of the property, they will need to put up the 10% themselves.
At least 6 in every 10 first-time buyer applicants had some form of a parental gift. Without those parental gifts, they wouldn’t have been able to buy the properties. However, Avant Money’s policy will be that the deposit will have to come from the buyer’s savings themselves.
There will likely be some sort of tiering of rates in place too, which may be a barrier for some.
Will other banks react?
It’s likely that other lenders will react. One of the biggest markets at the moment is the switcher market, as there aren’t enough properties at the moment.
Banks will be concentrating on high-quality applicants and brokers will refer clients to those who have the best rates.
It will be difficult to match the rate that Avant Money comes out with though, as Avant Money won’t have the same overhead as lenders here. Other lenders may lower their prices, but it’s unlikely that they will match Avant Money’s rate. They may also offer different features to their products to try and balance it out.
By going through the broker channel, Avant Money is keeping its overhead as low as possible. The lower the overhead, the better the deal they can offer the customer.
The switcher market
In the past, the only time people changed their mortgage was when they moved property. We’re noticing that people who have existing mortgages and unblemished records with existing lenders don’t qualify for the mortgage they already have when they come to refinance. We didn’t expect to see this.
Now even at the application stage and people are buying their first property, they want to know what will happen after they come out of their fixed-rate and what rates will then be available. People will switch if their lender isn’t going to be competitive in three or five years time.
Cashback mortgages are a little bit controversial. These cashback mortgages though can be very valuable for first-time buyers who’ve barely got enough money to pay the deposit.
In some cases, if people borrow €300,000, they’ll get cashback of €6,000 and that will pay their stamp duty or their solicitor fees, or help furnish their new house.
You might not be able to switch at the end of your fixed-term mortgage, so make sure you consider this when looking at cashback offers.
An Post Money
Nothing’s been mentioned about An Post Money entering the mortgage market in the last few months, but there were rumours it was looking to enter with a partner lender. If An Post comes in, it will have to be a similar product or a product with a unique feature so that it can compete with Avant Money.
Small lenders have developed niches in their products that make them different to the bigger lenders.
What are smaller lenders offering?
With ICS Mortgages, if you opt for a fixed rate you’ll be allowed to pay an extra 20% off every year over the course of that fixed rate.
This means that there’s no penalty for those who want to pay off a lump sum and reduce their mortgage.
If you’re a public servant, they’ll base your salary on an increment that’s two tiers up from what you’re on at the moment. That could make a difference of €15-20,000. It takes into account future earnings in the application stage.
Finance Ireland is particularly strong for self-employed people. It takes into account depreciation, profits, pensions, etc.
What do you think of the Central Bank mortgage lending rules?
With the Central Bank’s mortgage lending rules you can only borrow up to 3.5 times your income, you need to have a 10% deposit.
I think they’re working well. In the last three or four years, we’ve seen the stabilisation of the market and there’s now more responsible lending. Lenders will tell you that their loan books in recent years are of the highest quality and arrears are at record low levels.
I think that the rules are unfair on second-time buyers, as they’re restricted to qualifying for 80% of the purchase price. They need a 20% deposit instead of a 10% deposit unless they can get an exemption.
At the moment 1 in every 5 customers can get a Central Bank exception, but I think that should be increased to every 2 in 5 because the majority of people looking for the exemptions are first-time buyers and they really need them.
I think that the Central Bank should also allow the lenders to roll on their exemptions to the next year. The lenders are really cautious about not exceeding their limit and as a result, they come short every year. They’d prefer to lend less rather than overshoot.
How has Covid impacted business?
It’s had a terrible impact on the market. There’s a lot of people who have signed contracts and got loan approval for new developments.
If you’re at the approval in principle stage, this is where the lender tells you how much they’re going to give you, if you’re on the Pandemic Unemployment Payment, they won’t bring you to the loan approval stage.
The banks have ceased giving exemptions altogether. Over the past few months, with the exception of AIB, no bank has given an exemption. This has a major impact on the market.
If one bank starts to offer exemption again, other banks will likely follow suit.
Do you think this impacts property prices?
Prior to the lockdown, properties were coming close to their guide price but might have been 5% off. We’ve seen cases where properties were guiding €450,000 and sold for €420,000. Now we’re seeing cases of those properties selling in excess of their guides.
There’s a massive number of people with approvals, who don’t need any exemptions and are bidding on properties. Due to demand and people saving during the crisis, prices are going up.
Are there any innovations you’d like to see in the mortgage market here?
In the past, lenders offered offset mortgages. This is where people would have a substantial deposit and decide they want to take a mortgage out, but not want to touch all of their deposit. If they placed that deposit with the bank, the bank would offset that against their mortgage amount and the client would only be paying interest on the remaining balance.
ICS had a facility where you could pay your mortgage twice a month. By offering a bimonthly facility, it meant that the principle was going down quicker every time you made a payment. You’d end up paying less interest over the course of the mortgage.
Repayment holidays would also be an attractive incentive. Lenders could take a three-month break from paying their mortgage every five years or so. It would be invaluable for people at times when they need more money.
Covid payment breaks
The interest that you should have paid during the 3-month break is added to your principle. You’re then paying interest on your interest over the remaining term.
Once they’re seen to be fair and transparent, it’s reasonable.
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