Borrowers face bigger interest rate hikes from non-banks
The growth of non-bank lenders in the home loan market potentially exposes more borrowers to faster and larger interest rate increases, according to new research from the Central Bank.
On-bank financial institutions (NBFIs) have grown significantly in the mortgage market in recent years by acquiring loan portfolios from banks and through aggressive sales through the influential broker channel.
Non-bank mortgage lenders, which include Finance Ireland, Dilosk and Avant, currently hold 14% of all Irish mortgages and have increased their market share of new loans from just 3% in 2018 to 13% in 2021 – a period of record interest rate.
Now that the European Central Bank is set to raise rates in July, their funding model makes them more vulnerable than their banking competitors to the cost of funding.
“Because NBFIs are more dependent on market funding – unlike banks, which can rely on more stable customer deposits – NBFIs may be more sensitive to developments in global financial markets,” the Central Bank said.
“As a result, NBFI interest rates may rise sooner and to a greater extent than bank rates.”
However, rate sensitivity has so far been an advantage for non-bank lenders. They were able to raise funds more cheaply and reduce the prices of their loans while banks, which had been losing money on customer deposits for years, struggled to maintain their margins.
Avant launched the cheapest mortgage on the market in August 2020 – a key factor in the rapid growth of its mortgage portfolio over the ensuing 18 months. But its competitor ICS, a Dilosk brand, has already raised prices this year in anticipation of a changed interest rate environment.
Non-bank lenders are most exposed to the buy-to-let and refinance segments of the market and, because they have acquired a large number of old loans from banks, they have half of the arrears cases in rate, so interest rate sensitivity is a key risk factor.
Still, brokerage sources said they expect non-banks to limit their rate hikes to the shortest part of their mortgage portfolio, meaning three- and five-year fixed-rate mortgages will become more expensive, but the prices of 10 or 20 year loans should remain stable. , as these are backed by long-term investors like pension funds.
By contrast, brokers expect banks to raise rates across their product line in tandem with the ECB, which is expected to rise by at least half a point this year.
At the same time, the mortgage market is changing in a way that could further strengthen the competitive position of non-banks.
Ulster Bank and KBC leave the Irish market, leaving nearly a quarter of the mortgage business up for grabs.
With mortgage brokers now originating almost half of all new home loans, non-bank lenders – who get almost all of their business through intermediaries – stand to benefit from the restructuring.
This week Bank of Ireland was ordered by the Competition and Consumer Commission to provide Dilosk and Finance Ireland with €1 billion in funding for new loans as a condition of its acquisition of the mortgage portfolio from KBC.