Might financial institution exits truly assist minimize mortgage charges?
The proposed exit of Ulster Bank and KBC Bank Ireland from the Irish market is widely viewed as anticompetitive as they account for around 25% of home loans. Especially at a time when the average new Irish mortgage rate is well above the euro area.
Irish banks have long complained about the ramifications of having to hold much more expensive capital on mortgages than your standard European bank, a legacy of the losses suffered by lenders after the housing crash.
In one interesting analysis, Eamonn Hughes, the banking analyst at Goodbody Stockbrokers, which is being acquired by AIB, was busy putting the building blocks of mortgage rates together on his calculator.
Hughes estimates that the average Irish mortgage rate for owner-occupiers at the three banks listed is 2.63 percent, compared to 1.31 percent in the EU. Together with the fees typically charged on European loans, the average EU interest rate rises to 1.58 percent.
The capital requirement in the republic corresponds to 0.5 percentage points of a mortgage rate, which is 2.6 times the EU value. Irish financing costs are almost a third higher at 0.4 points, while loan allowances are 0.2 points locally, compared with 0.12 points in the EU.
The real difference, however, is in the running costs, including staff, IT expenses, duties, and other general overheads. Hughes estimates that operating costs are 1.05 points the average Irish mortgage rate, compared to 0.65 points in the EU.
The analyst estimates that Irish banks are making a profit of 0.47 percent on mortgages. While this is higher than the EU norm of 0.32 percent, Irish profit margins are lower at 18 percent. European banks achieve a margin of 24 percent on their average headline prices. “There are no above average returns on Irish mortgages,” he says.
If Permanent TSB and Bank of Ireland were to grow in size by taking over most of the Ulster Bank and KBC Bank Ireland mortgages at a time when the housing market is dysfunctional, they could cut running costs and some of the savings to borrowers pass on . At least that’s the theory.