Signs of competition with the arrival of a new lender in the market
It’s not yet clear how the real estate market will react to the economic fallout from Covid-19, but a picture of sorts is emerging.
CSO figures earlier in the week suggested house price inflation nationwide had virtually stagnated in the year to June, with prices in the capital down 0.7 %.
The volume of transactions in June fell by a third compared to the same month last year.
It will take several months for a full picture to emerge but, so far, the anticipated 10-12% price decline does not appear to be materializing.
The latest mortgage data, meanwhile, points to a relatively resilient market, but with signs of weakness still apparent.
According to the latest figures from the Federation of Banking and Payments, mortgage drawings amounted to 1.5 billion euros between April and the end of June, down 35% over the year.
However, mortgage approvals in June remained weak at 536 million euros, down 48% on the year.
Nonetheless, lenders appear to be aggressively targeting potential borrowers, with signs of increased competition in the market.
This is despite the decision by many to grant payment breaks to thousands of mortgage holders affected by the economic effects of the pandemic.
Additionally, banks have recently set aside huge sums of money to cover the cost of potential bad debts.
All in all, it seems like an odd time to target new loans.
Why are banks so eager to attract new mortgage customers right now?
Much seems to have been inspired by the promised entry of a new player into the mortgage market.
Avantcard – which already has a presence here in the credit card and personal loan market – has announced plans to start selling mortgages in the Irish market in the coming months under the Avant Money brand.
It is owned by Spanish lender Bankinter, which already has a significant mortgage business, mainly in Spain and Portugal.
Avant Money says it plans to offer fixed rates below 2% to new customers here starting in the fall. The products will be offered through the broker network.
“It massively undermines the opposition and provides much needed competition in the industry,” said Rob Flynn of price comparison site bonkers.ie.
He pointed to the fact that Irish consumers are paying an average rate of 2.87% on new mortgages.
And if they have fallen slightly in recent years, the rates there are still nearly double the average for the euro zone.
How have the banks reacted?
Established lenders in the market were quick to react, with Permanent TSB being the first to emerge from the traps with a reduction in its mortgage rates.
It said it was reducing its standard variable rate by 0.55% and it was reducing its fixed rate products to 2.95%.
Ulster Bank and KBC responded with cashback offers of up to €1,500.
They are the latest to offer such products on the market with Bank of Ireland, Permanent TSB and EBS all offering repayment offers of 2% (of the mortgage value) or more.
“Not all lenders in Ireland will be able to compete with Avant Money on rate alone and will need to differentiate themselves in other ways,” said Daragh Cassidy, head of communications at bonkers.ie.
“There is still much debate over the merits of repayment agreements, with many pundits complaining that they have led to higher interest rates for mortgage holders here.”
However, he pointed out that these products have become hugely popular in Ireland and look set to remain a part of the mortgage landscape for the immediate future.
And, quite simply, they suit some buyers.
“It’s wonderful to finally be able to get your dream home on a mortgage, but it’s not much use if you can’t afford to furnish it,” Cassidy said.
Karl Deeter, founder of OnlineApplication.ie, warned that when it comes to cashback, buyer beware.
“Cashbacks are attractive because people love money,” he said.
“The best way to present credit is with the cost of ownership. People usually end up paying a slightly higher rate for cash injections. So you end up paying for it,” he explained.
He pointed out that the savings on a loan at a reduced interest rate, without the incentive of a repayment offer, could amount to tens of thousands of euros over the life of a loan.
Mr Deeter said that, given the power, he would ban money-back offers.
“If you think you’re getting free lunches from the bank, you’ll be a very disillusioned, hungry person,” he said.
Are mortgage interest rates likely to fall further now?
Banks will no doubt come under pressure in the coming months to cut mortgage interest rates further, which will put even more pressure on their margins.
They’re feeling the heat on all sides right now with lending rates falling and deposit rates in negative territory, which means it’s generally costing banks to handle customer deposits where in the past they did. would have made money on these piles of cash.
So far, banks have been reluctant to pass these costs on to household savers in the form of negative deposit rates.
Most have started charging large companies and pension funds and, in some cases, large SMEs for deposits.
However, the banks’ argument that they carry a high proportion of bad debt inherited from the last recession, and that this should be reflected in the cost of credit, is starting to ring hollow given that many of them have offloaded a large portion of these loan receivables through loan book sales.
This would suggest they have the option to cut rates further, but they will likely seek to recoup the money in other ways, such as extending deposit fees to a larger cohort of customers or additional fees for transactions. and account management fees.
“The fact that another lender has entered the market, and the fact that other banks have reacted before he lends a single euro here, is proof that we are once again becoming a viable market,” Karl Deeter said. .
So, are we on the verge of a mortgage war? It seems that the first shots have been fired.