Irish Mortgages and ECB rates

The ECB largely controls short term interest rates in the euro money markets, but the feed through from there to retail rates in each member state is also influenced by a range of other factors, including local banking conditions and competition. That country effect is clear from the latest figures on new mortgage rates at end-March, with a range from 2.3% to 5.4% around the average of 3.52%.

That average figure is 206bp up on the year and only reflects the change in ECB rates to February, which at that time was 300bp. Rates rose by a further 50bp in late March and by 25bp last week , so the full impact of monetary policy changes has yet to be felt.

In Ireland, the ECB tightening cycle has not to date had a major impact. New mortgage rates actually fell for most of 2022, and although rising sharply in March, by 62bp to 3.54%, still left the annual change at only 76bp, well below the norm elsewhere, with rates here now the third lowest in the EA, having been for years the highest.

Why the muted rate response here, which is all the more surprising given that two of the five main bank mortgage lenders have left the market?. The answer is twofold. One relates to the cost of funding for the remaining Irish banks, which has been dampened by huge amounts of household deposits in the banking system, standing at €151bn from under €100bn five years ago.Most are in current accounts, classed as overnight deposits, and pay virtually zero interest (0.03%). Of course the banks could have raised those deposit rates (and rates on longer term deposits are starting to inch higher) but deemed it unnecessary given the scale of excess deposits in the system( deposits exceed loans by €74b). Banks had also lost some market share to non-bank lenders, largely dependent on market funding, so utilised the competitive advantage on deposits to undercut the non-banks and regain market share. In effect, households with deposits have been subsidising new mortgage borrowers.

The ECB impact on existing loans has also been muted. The average mortgage rate on outstanding PDH loans was 3.20% in March, having risen by 74bp over the past year. Again that is low relative to the change in ECB rates, reflecting the high and growing share of fixed rates; 65% of outstanding PDH mortgage are on a fixed rate, a far cry from the position a decade ago, with less than 10% fixed.

Standard variable rates have risen , albeit modestly to 3.54%, but the biggest impact was felt in Tracker rates, linked to the ECB refinancing rate, with the average in March at 3.47% . The Tracker spread is around 1.1% so the current refi rate of 3.75% implies a Tracker rate of 4.85% over the next few months and a possible cycle high of 5.35% if current market expectations are borne out.

The Tracker mortgage share is falling steadily as new fixed loans replace maturing Trackers,and now amounts to 22% of outstanding PDH loans, which in round numbers equates to 130,000 mortgages with Irish banks. These borrowers have benefited from low ECB rates for the past decade, paying only around 1.1% for most of that time.

These published mortgage rates from the central bank relate to bank loans only, and 114,000 or 16% of mortgages are held by non-banks, where monthly reporting is not available. The central bank has just published an update, however, showing the average rate is 3.97%, so well above the 3.20% bank average. The percentage of fixed loans is much lower than the bank equivalent, at 31%, and this largely explains the differential, with standard variable rates much higher, at 5.12%% versus 3.64%. A third of non-bank mortgages are Tracker, again well above the Bank figure, or some 37,000, although the rate is actually slightly lower , at 4.25%, than the 4.37% paid by bank Tracker holders.

A very diverse picture then on mortgage rates, both across countries and within Ireland. New borrowers here have been sheltered from the full impact of tighter ECB policy by the scale of household deposits, while the impact on existing borrowers has been dampened by the high percentage of fixed loans. The losers have been those on Tracker rates, with more pain to come, albeit having benefited for years ,but the relatively low numbers involved ( 140,000 out of a total PDH figure of over 700,000) means that to date higher ECB rates have not had a big impact on the Irish economy,or indeed on underlying inflation, which is in theory the rationale behind the ECB’s actions.