Lurking in a Central Bank release on Monday showing that Irish mortgage default rates fell for the 35th straight quarter in the three months to June was something that may underscore why some lenders are tightening their lending criteria.
The data shows that cases of mortgages where payments are up to 90 days late – the cut-off point before they are widely deemed to be in default – rose by almost 1,200 on the year to 14,443. While the uptick might be an anomaly, with the figure actually down on the quarter, it should certainly give banks reason for caution as households grapple with soaring energy, food and other costs.
It’s widely expected that the mainstream Irish banks will move in the near future to raise new fixed-rate and variable mortgage costs, following 1.25 percentage points of European Central Bank hikes since late July.
But they will be aware of the danger that sharp increases – with the markets pricing in more than 1.75 points of additional ECB rises by the middle of next year – will be too much for households that are already struggling with general inflation.
Balancing act
It’s going to be a difficult balancing act for banks. The last thing they want is to boost their net interest income line with rate hikes, only to have this offset by a spike in loan loss provisions for problem mortgages.
Executives from the three remaining Irish banks said between late July and early August, as they reported interim results, that they had not yet seen an increase in problem mortgages as a result of the cost-of-living crisis.
However, Bank of Ireland set aside €47 million in the first half of the year to cover potential loan losses at a time of “economic uncertainty, primarily driven by Russia’s invasion of Ukraine, inflationary pressure and interest rate expectations”. And AIB signalled that it planned to make provisions to cover similar risks in the second half of the year.
ICS Mortgages and Finance Ireland have each started recently to stipulate that prospective borrowers have a certain amount left over every month, after living and mortgage expenses, to secure a new loan. Bank of Ireland has also signalled it plans to take a more cautious approach to assessing affordability. The increase in short-term arrears will give reason for others to follow suit.
