Key Post Briefing: Irish mortgage rates are almost 2% higher than the Eurozone average!

[Brendan Burgess]

Summary

• The average rate for new mortgage business is around 4.5%
• The average across the Eurozone is 2.64%
• An Irish mortgage holder with a mortgage of €200,000 is paying almost €4,000 more interest a year than their Eurozone counterpart.
• This affects all borrowers with variable rate mortgages and not just new borrowers. If the rates for new business were reduced to the Eurozone averages, existing borrowers could switch lenders.
• Irish banks are making up to €1 billion in super profits every year from this overcharging
• The state owns three banks which are making around €500m in super profits.
• The average Eurozone borrower can fix for 10 years at 3.09%!

How do Irish lenders justify these very high rates?

During the banking crisis Irish lenders had to pay very high deposit rates to attract deposits. In addition, they had to pay a premium to the government for the deposit guarantee. Now that the banks have been adequately capitalised, they have been able to reduce the deposit rates paid and they are no longer paying for the guarantee. But they have not reduced the variable mortgage rates.

Irish mortgage lending is indeed riskier than in other Euorzone countries, because there are almost no sanctions for people who can't or won't pay their mortgages. So all Irish borrowers are paying a higher rate to compensate for those who don't pay. So Irish losses can be expected to be higher. But this explains the higher rates, only for high LTV mortgages. The lenders do not need to build in a margin for people whose loans are less than 75% LTV, but these borrowers are being ripped off to the same extent.



Commentary

Around half of all new mortgages are supplied by the three banks fully owned by the Irish state - AIB, EBS and ptsb. So an arm of the state is overcharging its customers by around €500m a year.

The government should take steps to encourage foreign banks to enter the Irish mortgage market to bring down rates.

Some commentators have suggested that if long term fixed rates were more prevalent in Ireland, it would help to smooth out property price bubbles. In fact, Ronan Lyons went as far as proposing that variable rates should be banned! The banks have argued that there is no demand from Irish consumers for long term fixed rates. In fact, there would be plenty of demand if the rates were 3.09%

 

[Brendan Burgess]

The Central Bank is publishing misleading information on mortgage rates

The Central Bank claims that the average rate for new mortgage business in Ireland is 3.15%.

When I saw this rate of 3.15% in a Central Bank press release, I knew it was wrong. Naively, I thought that a simple email to the press office would sort it out. In a very frustrating exchange of emails and phone calls, the Central Bank claimed that their published rate was correct. They even suggested that new cheaper loans for home improvements might be bringing down the average. They repeatedly refused to allow me to speak to anyone in the statistics department who would have been able to clear it up immediately.

It was only when I persisted and eventually suggested that they must be including restructured trackers as new loans, that they admitted that this is what they were doing. They claimed that the ECB definitions would allow this. I don't agree with this interpretation.

The Central Bank is misleading Irish consumers and the European Central Bank. They should withdraw their figures and publish the correct figures immediately.



Central Bank Press Release

This was what they called their Key Development

The interest rate on new loan agreements to households for house purchase, with either a floating rate or initial rate fixation of up to one year fell by 4 basis points to 3.15 per cent at end-June 2014. This is some 51 basis points higher than the equivalent euro area rate.

Anyone with any knowledge of the Irish mortgage market, knows that the rate for new loan agreements for house purchases is not 3.15%. The Central Bank should also know this as well.

Update 6 October 2014

While the Press Office continues to publish misleading statistics, the Governor has acknowledged the problem
[broken link removed]



"Meanwhile it is noteworthy that spreads on non-tracker mortgage interest rates have moved higher and higher, not responding positively to the lowering of the ECB policy rate from 1.5 per cent in mid-2011 to 0.05 per cent today (Figure 2). (This is not quite visible from the usual statistical data series on aggregate mortgage lending rates since some tracker rates – mostly on restructured mortgages – are included in the standard definition for that series). Admittedly, despite this widening of spreads on non-tracker mortgages, the banks have not been profitable. Still, it is reasonable to ask whether, having under-priced lending so badly in the early years of the millennium, they could end up over-pricing it now. Ireland is not the only country to have been experiencing widening spreads. In the UK too they have moved up since the crisis and, for mortgages, are about as high as here. Spain and Italy are other large countries where spreads on small loans, including business loans widened appreciably following the crisis, though with some reversal more recently (Figure 3)."

 

[Brendan Burgess]

What is the true rate for new business?

Forget the Central Bank, and go directly to the websites of the 5 biggest lenders:

[broken link removed]|3.9% to 4.6%
[broken link removed] |3.92% to 4.56%
PTSB |4.1% to 4.7%
Bank of Ireland |4.2% to 4.6%
AIB |4.16% to 4.57%
[broken link removed]|4.2% to 4.6%

It's hard to calculate the average exactly. The lowest rates are for customers with a deposit in excess of 40%, while the higher rates are for customer borrowing over 80%. I would imagine that there are far more borrowers borrowing over 80% than there are customers borrowing less than 60%. I think that the average rate is around 4.5%

It is certainly not 3.15%

Note 1: AIB and EBS have reduced their rates by 0.25% since this table was compiled.

 

[Brendan Burgess]

What are borrowers in other Eurozone countries paying?

The Finish Central Bank has a [broken link removed]of all the information for all the countries.

The average is 2.64%

The cheapest is Finland at 1.83%. All the rest are below 3.36% other than Cyprus which is 4.4%

The average Eurozone borrower can fix for 10 years at 3.09%

MFI interest rates on euro-denominated deposits and loans by Euro area residents

variable rate|2.64%
fixed from 1 to 5 years|2.83%
fixed from 5 to 10 years|3.09%
Fixed for over 10 years|3.19%

Three Irish lenders offer 5 year fixed rates at 4.8%

Only Bank of Ireland offers a 10 year fixed rate which is currently 4.99%.

 

[Brendan Burgess]

Why are Irish rates so much higher than the euorzone rates?

It's not because Irish banks have to pay a lot more for deposits

|Average Eurozone|Ireland |difference
Mortgage rate|2.64%|4.5%|+1.86%
Deposit rate|1.35%|0.65%|- 0.70%
Margin|1.29%|3.85%|+2.56%

The 0.65% rate for deposits looks too low as well. Most term deposits in Ireland are paying more than this, but it's safe to say, that the much higher Irish mortgage rates are not because the banks are paying very high rates on deposits.

It's fair to say that the Irish banks are getting margins of at least 2% higher than the average.



Are costs much higher in Ireland?

In other Eurozone countries, if people don't pay their mortgages, their homes are repossessed. So the lenders have far lower losses than in Ireland.

The majority who pay their mortgage in Ireland, are paying for the minority who can't or won't pay their mortgage. But this can account for only a small part of the difference.

 

[Brendan Burgess]

How much is this costing the average Irish borrower?

This is affecting all borrowers on Standard Variable Rate mortgages. Not just new borrowers. If new business rates were lower, rates for existing borrowers would have to fall as well.

The rate difference is 1.86% (4.5% - 2.64%)

So the additional interest on a €200k mortgage is €3,700 per year.

How much additional profits are the lenders making?

There is about €50 billion in home loans on variable rates, so the Irish banks are making around €1 billion in extra profits each year.

Why do European banks not lend to Irish borrowers at 4.5% instead of to their own citizens at 2.64%?
Probably because the Central Bank has been telling them that the mortgage rate for new business in Ireland is only 3.15%, so it's hardly worth bothering for that level of difference.

It's interesting that KBC, a Belgian bank, is aggressively lending in the Irish market at rates lower than the rates from the Irish owned banks, but much higher than they would earn in Belgium, where the average rate for new business is 2.64%! [broken link removed]

 

[Brendan Burgess]

Where did the Central Bank get the 3.15% figure?

This is the explanation they sent me by email (I have highlighted the bit in bold)

the ECB definition of new business covers all new loan agreements denomination in euro, granted to Irish or other euro area households, including:
·[FONT=&quot]All financial contracts, terms and conditions that specify for the first time the interest rate of the loan[/FONT]
·[FONT=&quot]All new (re)negotiations of existing loans[/FONT]

The ECB has very precise definitions of new business to make sure that banks only give them information on new business.

The Central Bank argues that all the trackers which have been restructured are "re-negotiations of existing loans" So all the tracker mortgages at ECB +1%, who are now paying 1.15%, are being included in the figures. As 10,754 mortgages were restructured in Q2 compared with only 4,803 new mortgages being issued, the restructuring far outweighs the genuine new business.


I do not agree with the Central Bank's interpretation of the ECB's definition which is found in this Regulation, the relevant bit of which I have attached.

Regulation of the ECB of 8 July 2014 amending Regulation (EU) No 1072/2013 (ECB/2013/34) concerning statistics on interest rates applied by monetary financial institutions (ECB/2014/30)

23. Loans for debt restructuring are not per se excluded from renegotiated loans. However, if the restructuring involves a renegotiation of the interest rate, and as a result, the loan is granted at a rate below market conditions as described in paragraph 28, it should not be included in renegotiated loans nor new business.

It is quite clear from this definition that the ECB wants to exclude restructurings which have been done at below the current market rate.

Surely the Central Bank knows that the true rate for new mortgage business is not 3.15%?
Of course it does.

Then why does it publish this misleading rate?
I have absolutely no idea.

 

[Brendan Burgess]

Charlie Weston covers this issue in today's Irish Independent

Central Bank accused of misleading buyers on mortgage rates

Charlie got a lot further with the Central Bank than I did:

The Central Bank has now admitted that mortgage figures it publishes are far lower than a new buyer can get because it includes any existing mortgages that have been restructured, including thousands of low-priced trackers.
...

The Central Bank has rejected claims it is distorting the true cost of a mortgage here.

But it has conceded that it is going to change how it calculates average mortgage rates in Ireland so that the new and renegotiated rates will be separated out.

 

[Jim2007]

There is no reason why a German or French bank would lend to its customers at 2. 64% when they could be making far more profits lending to Irish customers at 4.5%. They presumably believe the Central Bank figures that the additional rate in Ireland is only 0.5% so it's not worth bothering about.

You need to remember that Basel III will really start to bite from the 1st of Jan 2015 and it is widely acknowledged that all banks will struggle to meet the liquidity ratios for the next several years (full compliance is required by 2019). In this respect mortgage type instruments are at best considered a Level 2B asset and are subject to a 25% haircut. So they are not a great choice to hold in the circumstances.

Consequently financing the mortgage industry is going to be an issue. I would expect Irish banks will want to reduce their exposure and other European banks will not be too excited about getting involved.

 

[Brendan Burgess]

Hi Jim

That is a good argument for German banks to reduce their total mortgage book. But if they are going to write new mortgages, why not write them at 4.5% in Ireland instead of 2.6% in Germany?

 

[dub_nerd]

Perhaps the first question that must be asked is why foreign lenders are heading the opposite direction and fleeing the country ( NIB / Danske, ACC / Rabo, RBS trying to divest itself of Ulster). Why have they decided they don't want to operate in post crash Ireland? Did they look at the unaddressed legal loopholes, the moratoriums on repossessions and the knock-on effect on arrears levels, and decide Ireland wasn't a serious place to do mortgage business?

 

[dewdrop]

Congrats to Brendan on highlighting this issue and for all the research and time needed to assemble the data,

 

[dub_nerd]

+1

 

[Jim2007]

Hi Jim

That is a good argument for German banks to reduce their total mortgage book. But if they are going to write new mortgages, why not write them at 4.5% in Ireland instead of 2.6% in Germany?

For most of these banks, mortgages is part of the business, but not the business as it seems to be for Irish banks and the German banks are seeking to maintain the business rather than to grow it. Remember any funds applied to mortgages will suffer a 25% reduction in liquidity after 1st Jan. next when banks are required to meet at least 60% of the liquidity ratio.

As a general rule at least in the Euroland countries, banks tend to only do mortgages in their home country, since getting into the business is not so straight forward. Also in Ireland's case we have common law, while most of Europe has civil law so it is a very different situation. But that said, even around Basel where everything is very similar, it is almost impossible to find a bank willing to consider a cross border mortgage even when the border is just a couple of hundred meters down the road.

 

[Delboy]

Great work Brendan, well spotted and investigated.

But it does kinda make sense. Repossessions are a non event here so the banks have to factor that in and it's therefore to be expected that we pay higher rates.

And as Dub_Nerd points out, we'll soon be left with just the Irish banks, and thus less competition. So even more chance of higher rates.

Can't wait to see David, Ross, Jerry et al come out now and hold their hands up in responsibility for the higher rates!!!!
So we pay through our taxes and through our mortgages for those who get to live beyond their current means....gotta love capitalism Irish style

 

[Brendan Burgess]

For some contrast, Aideen Sheehan has a good article in today's Indo, which shows that we are getting very low rates on our deposits:

Savers getting a tiny return as interest rates plummet

CONSUMERS are getting a fraction of the return on their savings compared to a year ago.

A survey by the Irish Independent has found that interest payments on a nest-egg of €10,000 have plummeted by up to 63pc since June 2013.
The worst fall occurred in the KBC Demand account, which now pays just €75 in interest, down a massive 63pc on the €200 it would have reaped in our survey last year.

The best value a consumer could get anywhere in 2013 on savings of €10,000 was €260 - but they still could have dipped into them if they needed.
However, falling interest rates mean that the best return this year has dropped to just €215 - and that's only if you lock them away for 12 months.

It's interesting that many foreign banks see Ireland as a source of cheap deposits

The following foreign banks which don't lend in Ireland, obviously see Ireland as a source of cheap deposits:

• Nationwide UK (Ireland)
• Leeds Building Society Ireland

What are the typical rates being paid by Irish mortgage lenders for deposits?


It's very hard to work out what the average deposit rate is. Many people have money sitting in their current accounts, on which they earn no interest at all. Some of the higher interest deposit accounts have catches which trip the unwary. For example, the ptsb online account pays 2% on amounts up to €50,000. But once the amount goes over €50,000, the rate is reduced to 1% for the whole amount.




The Central Banks says that the average rate is 0.65%


ptsb pays 1.8% for an online account - with 40 days' notice required

AIB pays 0.75% for amounts over €10,000 with 7 days' notice of withdrawal
Bank of Ireland pays 0.85% for amounts over €5,000 with 30 days' notice of withdrawal
KBC pays 0.75% for instant access with no minimum

 

[Gerry Canning]

Brendan;
Congratulations on
1. Highlighting the sleight of hand by Central Bank on Mortgage Rates,
It is more than a little irritating to have them (massage) figures on rates ; their answer does not pass junior grade!
2. Highlighting the deposit rates for savers.
..............

Another issue could be Novembers stress tests.
Questions;


Do Higher Mortgage rates help the test?
Do lower deposit rates help the test?
Does Having Mortgage Arrears lower help the test?
Does not yet having to provide the 3 Billion on PPI claims,help the test?

..........
Delboy; Have some sympathy with your (ire), but would quick rampant repos etc have left us in a better or worse situation?

 

[ashambles]

There are three possible reasons:

• The cost of funds for Irish mortgage lenders is higher - this is unlikely as the Central Bank says that the average deposit rate is 0.65%
• The cost of mortgage lending is much higher in Ireland - this probably does account for a small part of it. In other Eurozone countries, if you don't pay your mortgage, your home is quickly repossessed. In Ireland repossession rarely occurs. So mortgage lending is less secured in Ireland
• The most likely explanation is that Irish lenders are making super profits because there is no competition

I would have thought the main reason is banks need to balance off the trackers on their books. When the banks talk about their mortgage books and lending margins they include everyone, a tracker on 1.25% and the less fortunate on 4.5%.

If the Irish banks reduce rates to euro levels while still having trackers, then they're likely to lose money on their overall mortgages.

 

[Brendan Burgess]

Hi ashambles

Yes, the Central Bank has made that very point, in this report from 2012

[broken link removed]

I don't see why those with variable rate mortgages should be paying for the trackers.

But the Central Bank should be open about this. If the variable rate mortgage holders are being gouged, they should report this. They may justify it. But they should not add insult to injury by claiming that variable rate borrowers are paying only 3.15%.

 

[Brendan Burgess]

I thought it worth rereading [broken link removed] which was 2012

Conclusion

The analysis suggests costs relating to increased credit risk may be becoming an increasingly important factor in setting variable rates. Banks with higher arrears rates exhibit higher variable mortgage rates. The second result from our analysis is that it appears that some lenders are charging higher variables rates to compensate for the losses they are making on their tracker loans, controlling for our estimates of funding costs. A risk with such a strategy is that it may be counterproductive and continue to exert upward pressure on arrears. We find that after controlling for these additional factors, most of the divergence between banks SVRs is explained.

Table 2 High level estimate of bank funding costs as of December 2011

|€Billion|rate

Total retail deposits|123| 1.86%
Central Bank|70|1.06%
Corporate deposits|22|1.63%
Secured borrowing|18|3.93%
Other |49
Total funding |282
Cost of funding|2.2%
Cost of ELG|0.4%
Total cost of funding|2.6%

It would be great to see an update of these figures, but they have all fallen dramatically since December 2011. Presumably the composition has changed as well.

• The rate they are paying on retail deposits has fallen to 0.65%
• The Central Bank rate is down to 0.15% (I presume that they charge the ECB rate)
• The 0.4% cost of the ELG is gone

The average cost of funds must be less than 1% at present.


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