Investec’s punt on mortgage market sends good signal

By all accounts, the switchboard at the Irish head office of South African bank Investec was inundated yesterday with calls from potential mortgage customers following reports that it was preparing to offer home loans to first-time buyers.

Competition has been lacking in this segment of the market since the financial sector crashed in spectacular fashion in 2008.

The landscape has changed dramatically over the past five years. Bank of Scotland (Ireland)/Halifax left with its tail between its legs while Denmark's Danske has downsized its Irish banking operation significantly.

Permanent TSB, the biggest provider of home loans in the boom, only recently re-entered the mortgage market with gusto, having in effect taken a breather for four years while issues around its ownership and viability were sorted out.

AIB, Bank of Ireland, Ulster Bank and KBC kept lending through the recession but at more modest levels than the Celtic Tiger years.

Investec was involved in the subprime mortgage market – shorthand for those with poor credit rating – through its involvement in Start Mortgages and Nua Homeloans. But it doesn’t have the legacy arrears issues that bedevil AIB, Bank of Ireland, Ulster Bank, Permanent TSB and KBC, particularly lossmaking tracker mortgages.

It will in effect be starting with a clean slate. It can charge realistic (and profitable) interest rates and will presumably require its applicants to have a sizeable deposit to bring to the table.

In the UK, Investec’s loan- to-value ratio for first-time buyers is 85 per cent. In other words, borrowers must be able to produce a 15 per cent deposit to qualify for a home loan.

In the heyday of the Irish property market, 100 per cent loans were not uncommon. In some cases, borrowers were even able to get additional loans to furnish their properties or pay legal fees. Permanent TSB offered mortgage cheque books that allowed customers to borrow for all sorts of reasons and add the sum to their mortgage to be repaid over the lifetime of that loan. It was crazy lending overseen by an ineffective regulator.

Welcome competition
From a competition standpoint, Investec's entry is to be welcomed. Bank of Ireland issued 40 per cent of mortgages last year, while AIB claims a market share of 46 per cent.

That’s an unhealthy concentration but, in banking, the competition rule book was thrown out the window when the global financial sector crashed five years ago and governments were forced to bail out so many of them.

The Big Two have also nudged up their variable rates at a time when the European Central Bank’s is at an all-time low of 0.5 per cent.

Investec’s move is timely given that the housing market here is beginning to stir from its slumber, particularly in Dublin. Figures from the Central Statistics Office suggest that house prices in Dublin were 8 per cent higher in July than a year earlier.

You might not necessarily think this from the latest mortgage data from the Irish Banking Federation. In the second quarter of this year (April to June), the total drawdowns in residential mortgages was €518 million, €6 million less than the same period last year. The value of residential mortgage drawdowns by first-time buyers was €242 million in the second quarter of this year, €7 million lower than for the same three months in 2012. In the first quarter of this year, the same figure was €140 million versus €198 million for the first quarter in 2012.

The number of mortgages approved in the first half of this year was 2,528, compared with 2,858 in 2012.

Some of the reduction in the mortgage figures can be attributed to the expiry of mortgage interest relief at the end of 2012. The figures are also skewed by the fact that there are so many cash buyers; about 53 per cent of residential sales are attributed to those funding the deal from their own resources.

Investec is expected to provide funding of about €250 million annually for new mortgages when it comes to market in the coming months. That equates to about 9.5 per cent of the total mortgage drawdowns in 2012.

Given that Bank of Ireland, AIB and the other lenders have stepped up the amounts they are making available for mortgages, the likelihood is that the €2.6 billion in drawdowns from 2012 will be beaten. So Investec’s share is likely to be sub 10 per cent.

The South African bank’s entry into the market won’t in itself be a game changer but its willingness to take a punt on this market might provide a signal to the wider world that the housing market in Ireland has finally turned.

This could prove more valuable to the Irish economy than the actual money Investec will make available to borrowers.