Irish Banks Could Raise Mortgage Rates Following Exit, Says Rating Firm

Irish banks may be on the cusp of raising mortgage rates in tandem with the European Central Bank, following the exit of rivals Ulster Bank and KBC Bank, according to ratings firm DBRS Morningstar.

Irish banks have been an “outlier” in Europe by increasing mortgage lending while keeping mortgage rates “relatively stable”, but DBRS believes this could change soon.

The entry of fintech companies, a large deposit funding base, and Irish mortgage rates that were already “much higher” than rates elsewhere in Europe, could explain why mortgage pricing in Ireland has not kept pace with ECB rate increases.

DBRS suggests Irish banks have been able to bide their time because much of their funding is from deposits, unlike many other mortgage lenders in Europe that have to tap increasingly costly wholesale market sources to fund some of their mortgage lending.

On the exit of major competitors, Ulster Bank and KBC Bank, DBRS said the remaining Irish banks are seeking to lure 1m “orphaned” customers, which could mean the “Irish banks might be delaying larger rate increases until the whole has been redistributed” later this year.

DBRS said Irish mortgage borrowers are better placed than in the past to absorb mortgage hikes. “Although a significant part of Irish borrowers will need to refinance their fixed-term loans in coming years, we consider borrowers are better-positioned to face an increased cost in mortgages than a few years ago,” said Maria Jesus Parra at DBRS Morningstar. Irish banks have long had higher mortgage rates than their eurozone counterparts.

Despite the gap having narrowed “significantly, ” some distance remains. DBRS said Irish banks had a starting point for mortgage interest rates of 2.72% in December 2021, a much higher rate than most European peers, where rates ranged from 0.79% in Finland to 1.65% in the Netherlands, with an average interest rate for the euro area of 1.31%.