To most, the exits of both KBC Bank Ireland and Ulster Bank from Ireland’s market is exceptionally harmful for competition in the country. This is especially true when acknowledging the fact that these two banks make up 25 percent of all home loans in Ireland. Negative reactions to the exits are especially the norm due to Ireland’s average mortgage rate that is persistently above Europe’s average.
This has been an enduring issue that banks have griped with. They make known that they are burdened by having to maintain significantly higher thresholds of pricey capital against loans compared to other usual banks throughout Europe. These policies stem from the lasting impact felt by lenders of the property crisis.
One member in the industry has an intriguing take on mortgage rates. Hughes is a banking analyst with Goodbody, a stockbroker company that is currently acquired by Allied Irish Banks (AIB). Hughes has been trying to assemble the factors that are influencing the mortgage rates.
According to Hughes calculations, the average Irish owner-occupier mortgage rate is 2.63 percent among Ireland’s three banks. This rate is about double the average rate across the EU which comes in at 1.31 percent. However, when accounting for fees that commonly come with the loans in Europe, that EU average would increase to 1.58 percent.
In Ireland, the capital charge is equal to 0.5 percentage of the mortgage rate. This figure is approximately 2.6 times greater than the EU number. Funding costs in Ireland are at 0.4 points which are almost one-third above EU figures. Further, loan impairment charges sit at 0.2 points in Ireland, slightly higher than the EU that accounts for 0.12.
Another difference between Ireland and the EU is witnessed through running costs. These running costs account for staff, taxes, IT spending, and other overhead costs. Hughes has estimated that operating costs take up about 1.05 points of the typical mortgage rate. This sits a bit higher than the EU equivalent which is currently at 0.65 points.
Hughes surmises that banks in Ireland make about 0.47 percent of a profit through mortgages, which is higher than the EU’s profit at 0.32 percent. However, Irish profit margins continue to be lower at 18 percent compared to average EU margins coming in at 24 percent.
Hughes theorizes that if Bank of Ireland and Permanent TSB took over the majority of mortgages from KBC Bank Ireland and Ulster Bank, they may be able to decrease running costs and pass along some of the savings they establish to borrowers.
“Can Bank Exits Actually Help Cut Mortgage Rates?” The Irish Times, 6 July 2021, https://www.irishtimes.com/business/financial-services/could-bank-exits-actually-help-cut-mortgage-rates-1.4612211?mode=sample&auth-failed=1&pw-origin=https%3A%2F%2Fwww.irishtimes.com%2Fbusiness%2Ffinancial-services%2Fcould-bank-exits-actually-help-cut-mortgage-rates-1.4612211.