Irish new mortgage rates among lowest in Europe as banks slow to pass on ECB rate hikes

The average interest rate on new Irish mortgages was more than a quarter of a percentage point cheaper than those across the wider euro zone in November, as domestic banks trailed overseas peers in passing on European Central Bank (ECB) rate hikes and households scoured the market for the best deals.

Data published by the Central Bank on Wednesday shows that the weighted average new Irish home loans rate was 2.57 per cent in November, unchanged from the previous month but 0.14 of a point lower than a year earlier.

By contrast, the average rate in the euro zone was 2.84 per cent, up 0.19 points on the month and 1.54 points compared to November 2021, the bank said. The Republic had the third cheapest new rates in the single currency region, behind France and Malta.

It follows on from Irish rates falling below the euro zone average in October for the first time since the Central Bank started compiling comparative figures in 2017.

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Irish mortgages were more than twice as expensive as the euro zone average in late 2021, mainly as a result of domestic banks facing higher regulatory capital demands as a legacy of the financial crisis and above-average operating costs.

Irish nonbank lenders have been hit by a spike in wholesale funding rates in the past 12 months

However, Irish banks have lagged behind many European peers in raising interest rates since the European Central Bank (ECB) hiked its main lending rate from zero to 2.5 per cent since July, as they are more reliant on deposit funding for their mortgage portfolios than market-based finance.

The banks have also received an income boost as the ECB switched from charging them negative rates of minus 0.5 per cent on money deposited with the ECB by the banks to paying them a rate of 2 per cent as the Frankfurt-based organisation increased its main rates.

Irish nonbank lenders have been hit by a spike in wholesale funding rates in the past 12 months, and have had to increase rates more aggressively than the traditional banks.

The past year has also seen a surge in Irish households searching for lower fixed rates on their mortgages as they fretted about the impact of official rate hikes. The Central Bank new mortgage rates figures exclude loans where a borrower renegotiated with their existing lender to move on to a different rate.

The latest industry data from Banking & Payments Federation Ireland showed that switching and mortgage top-ups activity accounted for about a third of the total of €1.46 billion of home loans approved in the State in October.

“I don’t think anyone had in their forecasts that Ireland was going to have among the cheapest mortgage rates in the euro zone,” said Daragh Cassidy, a spokesman for consumer price comparison website Bonkers.ie. “However, this is unlikely to be the case for much longer, unfortunately.”

“The ECB is almost guaranteed to hike rates by at least another 0.25 or 0.50 percentage points when it meets at the start of February, and by at least another 0.25 percentage points when it meets again in the middle of March.

“This means yet more rate increases from all the lenders are likely over the coming weeks. Indeed, even the most recent ECB hike from December hasn’t been passed on yet.”