Irish mortgage lenders may increase rates 'in tandem with ECB' this year

Banks may delay raising mortgage rates until they have absorbed 'orphaned' customers from KBC and Ulster Bank, ratings firm said

Irish banks have long had higher mortgage rates than their eurozone counterparts.

Irish banks may no longer be slow in raising mortgage rates in tandem with the European Central Bank, when rivals Ulster Bank and KBC Bank have finally closed their doors, ratings firm DBRS Morningstar has said. 

DBRS said the entry of fintech companies, the exit of Ulster Bank and KBC Bank, a large deposit funding base, and Irish mortgage rates that were already "much higher" than rates elsewhere in Europe, may explain why mortgage pricing in Ireland has not kept pace with ECB rate increases. 

"Irish banks experienced a significant increase in mortgage lending while maintaining mortgage rates relatively stable," DBRS said in the research, called 'Irish Banks' Mortgage Market Bucks the European Trend'.   

Irish banks have been an "outlier" in Europe since last summer by increasing mortgage lending while keeping mortgage rates "relatively stable".   

"Mortgage rate performance may be attributed to a change in the Irish banking landscape, with some traditional players exiting it and some new fintechs entering," the ratings firm said. 

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. 

Meantime, DBRS suggests the Irish lenders can 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. 

Irish banks have long had higher mortgage rates than their eurozone counterparts, and, there is still some distance to go despite the rates gap having narrowed "significantly", 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 Netherlands, with an average interest rate for the euro area of 1.31%," according to DBRS.  

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.