Fergal McGrath found himself in the company of thousands of fellow European Central Bank (ECB) watchers in Barcelona this week at a global gathering of buyers and sellers of bonds backed by assets spanning cars to corporate loans.
Over the course of Tuesday and Wednesday he held 25 meetings with investors in what are known as residential mortgage-backed securities (RMBS), a multitrillion-euro corner of the bond market where lenders raise funds for new mortgages by refinancing bundles of existing loans.
“The mood at the annual conference this year is certainly much better than it was in either of the past two years,” said McGrath, chief executive of Dilosk, which bought the ICS Mortgages brand a decade ago.
The 2022 gathering took place months after the Ukraine war started, when there was a strong view that the ECB was behind the curve in hiking interest rates to tackle inflation. The ECB was still trying to play catch-up when last year’s event took place, creating “a lot of instability and volatility” in the RMBS market, according to McGrath.
The central bank would end up increasing its main lending rate from zero to a record 4.5 per cent over 15 months to last September.
The ECB’s first move to reverse those increases – cutting official rates by a quarter of a percentage point on Thursday – had been well flagged, even if its president, Christine Lagarde, refused to be drawn on the pace of further reductions.
“But the overall view that rates have passed their peak and are on their way down again creates a much more stable environment for investors,” said McGrath.
And for ICS, too.
The lender’s parent has managed to sell €900 million of mortgage-backed bonds in two deals to investors so far this year – with pricing improving between the two transactions. This has allowed ICS to turn the tap back in for owner-occupier borrowers after it had been forced by tough market conditions to dramatically scale back activity in the autumn of 2022 – hiking rates and introducing the strictest lending criteria in the market based on borrowers’ income.
It cut certain fixed rates by half a percentage point last week, bringing its five-year rate for a loan of up to 80 per cent of the value of a property down to 5 per cent.
Although that does not put ICS up there with the market-leading prices, it is somewhat closer to the competition.
“We’ve seen an increase in applications since the announcement a few weeks ago,” said McGrath, adding that demand is also being helped by new features, such as offering repayment until borrowers reach the age 80 (subject to proving sufficient income in retirement) and allowing public sector workers’ income to be calculated as three levels further up the salary scale.
New entrants
It is not alone. Nua Money, a new nonbank lender backed by the Allen beef barons of Wexford, has secured a licence from the Central Bank and plans to start offering loans through an initial group of 10 brokers around the end of June, The Irish Times reported last week.
The company, cofounded by bond market veterans Fergal O’Leary and Mark Watson, is understood to be close to finalising a wholesale funding line from a big international bank. It is expected to diversify financing over time. Bert and Lance Allen, former owners of beef processor Slaney Foods in Wexford, acquired a 40 per cent stake in Nua Money last summer for €4 million.
“We believe there is a structural opportunity in the Irish mortgage market if you look at the underlying dynamics of the Irish economy: consistently strong GDP growth, a young and growing demographic, low unemployment and a structural housing shortage,” said Mark Watson, chief executive of Nua Money.
He added that Central Bank mortgage lending limits introduced almost a decade ago give the market stability.
Another start-up, MoCo, owned by Austrian bank Bawag, has reached €100 million mark in mortgage approvals in recent weeks, according to industry sources.
None of the new or rebooting nonbanks have – or plan to have – the best rates in the market. But that may change as official rates – and, by default, wholesale and capital market borrowing costs – move lower, according to mortgage brokers.
[ ECB rate cut: What it means for you and what might come next ]
The re-emergence of the nonbank lenders also comes as 80,000 homeowners come off fixed rates this year, according to Brokers Ireland, having been cocooned from the recent rates spike.
There were signs of a rally in the mortgage switching market in April, with the value of such loans approved rising 24 per cent on the year – albeit from a low base – to €90 million. A slump in mortgage switching from heightened activity in 2022 had driven overall drawdowns in the market down 14 per cent last year to €14.1 billion.
“We are definitely seeing a re-establishment of nonbank mortgage lenders in the market,” said Trevor Grant of Affinity Mortgages and chairman of the Association of Irish Mortgage Advisors. “They’re often more flexible on your non-typical case than banks.”
Much of the pitch from the newer entrants is around the technology they are using to make the process easier – and quicker – than dealing with banks.
Products that Nua is planning are expected to include loans tailored to workers from overseas who have relocated to the State, mortgages where borrowers can consolidate debt and equity release loans – in addition to standard home loans.
Still, observers say nonbanks – which had built up a combined market share from zero to as high as 20 per cent of Irish mortgage activity over the four years to the early part of 2022, before retrenching as funding costs soared – face a tough task returning to their peak.
“Service and price will remain the two most important factors [for borrowers],” said Diarmaid Sheridan, an analyst with Davy, a unit of Bank of Ireland. “Ultimately, mortgages is a scale business to justify investment in platform. The funding advantage for banks remains and will likely see this channel remaining the main source of lending.”
First wave
The first wave of nonbank lenders to enter the Irish mortgage market since the property boom was led by Finance Ireland, the State’s largest nonbank lender, which started to offer loans to owner-occupiers in late 2018.
ICS, acquired by Dilosk from Bank of Ireland in 2014 to focus initially on buy-to-let loans, ventured into the private dwellings space in 2019.
Avant Money, owned by Spanish bank Bankinter, launched what was the cheapest mortgages in the State at the time in the autumn of 2020, with fixed rates of 1.95 per cent for up to seven years.
These nonbank lenders “were particularly important in leading interest rates downwards from 2019 to 2022″, according to a Central Bank paper published in April on mortgage switching and the interest rate cycle. They were enabled by ultra-low rates on the wholesale and bond markets and the fact that, unlike the banks, they did not have to set aside mounds of expensive capital to cover potential shock loan losses.
However, the trend reversed abruptly once the ECB started to hike rates in July 2022. “Nonbank lending is more cyclical to financial conditions and responds more rapidly to monetary policy changes,” the paper said.
In the six months after the ECB hiked interest rates, new rates from non-banks – which had been focused on fixed-rate products – jumped from 2 per cent to 3.3 per cent at a time when bank rates increased only marginally, from 2.4 per cent to 2.5 per cent, it said.
The banks’ competitive advantage is the fact that they largely fund their loans from cheap deposits. While the three remaining Irish banks in the market each offer headline savings rates of 3 per cent for certain products, almost 90 per cent of customers’ money is in on-demand and current accounts, which are earning little or nothing. This allowed them to avoid passing on the full effect of ECB hikes to mortgage borrowers.
The two largest banks have about €60 billion of excess deposits between them sitting in the Central Bank earning interest at the ECB deposit rate which was cut by a quarter of a point to 3.75 per cent on Thursday. Only two years ago, the ECB was charging banks 0.5 per cent to hold their surplus money under a negative rates policy that began in 2014.
Because of the scale of the Irish banks’ deposits relative to loans, they even lagged the average euro-zone bank in increasing mortgage rates.
Bank of Ireland chairman Patrick Kennedy told the company’s annual general meeting two weeks ago that it had passed on less than 40 per cent of the ECB hikes to fixed-rate products, as it “sought to strike a balance” between increasing rates for savers and borrowers.
This, of course, calls into question how effective banks have been at transmitting central bank monetary policy in recent times. The whole point of the official rate hikes has been to encourage saving and dampen lending in a bid to rein in inflation.
Bank of Ireland, AIB and PTSB accounted for 93 per cent of new mortgage lending last year, with their positions further boosted by the exits of Ulster Bank and KBC Bank Ireland from the market.
Avant Money has been by far the most active nonbank lender in the Irish market in recent times – helped by the fact that it is owned and funded by a bank. (Its parent, Bankinter, said in May it plans to establish Avant Money as a fully-fledged overseas bank branch).
‘Irrational pricing’
Before Bawag acquired MoCo in March 2023 for a nominal amount of €35, the start-up had been backed by Dutch merchant bank NIBC.
However, MoCo told its original investors – including former AIB chairman Lochlann Quinn, former DAA and Aryzta chief Kevin Toland, Smurfit Kappa CEO Tony Smurfit and former Green Reit CEO Pat Gunne – that NIBC had decided against funding Irish mortgages after growing frustrated by the “persistence of irrational pricing” by mainstream Irish banks.
A spokesman for Bawag declined this week to talk about the pricing strategies of mainstream banks.
“We find the Irish market to be attractive with positive long-term macro fundamentals in place,” he said. “The MoCo team is currently working with a panel of 20-plus independent brokers with a focus on building strong relationships and delivering exemplary service. We have begun lending and continue to be excited about the Irish market and growth opportunity.”
But for now, Finance Ireland, the original post-crash nonbank mortgage lender, remains on the sidelines. Its chief executive, Billy Kane, told The Irish Times late last year that it was writing very little business as the mainstream banks engaged in “predatory pricing” practices.
The lender’s five-year fixed mortgage rate, for example, is 6 per cent for loans of less than 80 per cent of the value of a property. The same product costs 3.8 per cent Avant. The cheapest five-year rate on the market is 3.55 per cent on offer at AIB for homes with high energy efficiency ratings, according to price comparison tables on the Competition and Consumer Protection Commission’s website.
Kane can afford to be cautious on mortgages as Finance Ireland remains active in areas such as car finance, SME lending and agri-finance.
Meanwhile, lenders and would-be borrowers alike are holding out to see what kind of mortgage offering Revolut, the UK-based financial technology company that operates in the Republic under a Lithuanian banking licence, plans to come to the market with.
The neobank confirmed last September that it is planning to enter this space in the Republic, where it currently has 2.8 million customers.
Maurice Murphy, Revolut’s country head for Ireland, told the Business Post in an interview in April that developing the platform would “finish up relatively soon”. The mortgage product is expected to launch first in Lithuania and then come to Ireland second, the report said.
A spokesman for Revolut declined to comment on timelines when contacted by The Irish Times this week. “Unfortunately, [there’s] nothing more to say right now,” he said, “other than we’re working on it”.
