Banks say tough capital rules are reason for higher Irish mortgage rates

Irish home owners could be paying less interest on their borrowings if European regulators applied looser capital rules to Irish-based banks, according to a report that says the cost of capital is increasing the cost of mortgages in Ireland.

Commissioned by the Banking & Payments Federation Ireland and conducted by Martello Strategic Consulting, the report examined 600,000 mortgages totalling €83 billion across the five main Irish retail banks. It found that lenders in Ireland are required to hold about three times more capital for the perceived higher risk in their mortgage loans books when compared to average capital requirements in Europe.

This, the authors of the report said, was driving up the cost of lending and mortgages here, because the five banks have to put aside an additional €2.5 billion to deal with “unexpected losses”. And this requirement “increases the cost of mortgages in Ireland when compared to other countries as holding more capital increases the cost of loans”.

‘Trapped’

According to Brian Hayes, BPFI chief executive, despite an improvement in loan books in recent years, driven in part by the Central Bank of Ireland's macroprudential mortgage regime, capital requirements for Irish banks are still "trapped" at financial crisis levels dating back more than a decade.

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While Mr Hayes acknowledged the depth and persistence of that crisis means that Irish banks would still be subject to higher capital requirements than elsewhere in Europe, the approach of the European Central Bank hasn't changed in recent years, leaving Irish banks an outlier in the euro zone.

Irish non-performing loans (NPL) have fallen from 10.5 per cent in 2017 to 4 per cent in September 2020, compared with an EU average of 2.8 per cent.

“So much of the NPL reduction is still not captured in models by the ECB,” said Mr Hayes, adding there is now a “yawning gap” between Irish and EU banks, despite the increasing quality of the loan book here in recent years.

“This is having a direct impact on the mortgage market in Ireland,” he said.

Irish mortgage rates

Irish homeowners continue to pay significantly more for their mortgages than their European peers, despite interest rates being set centrally by the ECB.

Figures from the Central Bank for December show that Ireland had the second most expensive mortgage rates in the euro area, second only to Greece, with the average rate on new mortgages of 2.76 per cent. This compared with an average for the euro area of just 1.29 per cent, with average rates of less than 1 per cent in both Finland and Portugal. This means that over the course of 30 years, an Irish homeowner with a mortgage of € 300,000 will pay € 80,000 more than their German counterpart. The report however, did not indicate by how much mortgage rates might fall should capital rules be eased.

The report also noted that the difficulty in repossessing property is another key factor in determining Irish rates. The average recovery rates at the end of enforcement through the judicial process is around 11 per cent in Ireland, compared with 46 per cent in Europe.