Bank of Ireland's chief financial officer Andrew Keating expects Irish mortgage interest rates, which have fallen in the past five years, to start increasing again from here on – even though he believes the European Central Bank (ECB) may hold its main rate at zero until 2022.
Mr Keating said this was due to the increased amount of expensive shareholders’ money, or capital, that Irish banks have to hold in reserve against mortgages. This is required because of the scale of the mortgage arrears crisis in the Republic in the wake of the 2008 crash.
He also cited rising long-term funding costs in the international capital markets as a reason why home loan rates are set to increase.
"Given the level of capital that we need to hold against mortgages, that does mean that the direction of travel on mortgage pricing in this market is likely to be increasing from this point," Mr Keating told reporters after Bank of Ireland reported full-year results on Monday.
“My expectation is that the price of mortgages, particularly those longer-duration mortgages, will increase, reflecting the higher cost of money and reflecting the higher cost of capital.”
Bank of Ireland, where 92 per cent of its new mortgage loans business is on fixed rates, moved last month to cut the cost of its one- and two-year fixed loans, but increased its five- and 10-year rates.
Mr Keating said the bank was having to “lock in” higher long-term market funding rates to finance 10-year loans, even though expectations for the first ECB rate hike since 2011 are being pushed out.
Up to about six months ago, economists predicted the Frankfurt-based institution would raise its main rate in the second half of this year. However, the euro-zone economy has weakened significantly since then.
While Irish average standard variable mortgage rates, currently at more than 3 per cent, are significantly above the euro-zone average of below 1.8 per cent, lenders in the State need to put much more money in reserve against their loan books.
Goodbody analyst Eamonn Hughes estimates Irish lenders have to hold three times as much capital against mortgages as the average European bank. That's because Irish mortgages are deemed by regulators to be far more risky.
Bank of Ireland noted on Monday that its so-called risk-weighted assets (RWAs) on mortgages equate to 38 per cent of its residential loans portfolio, compared with 19.9 per cent for Italy, the next highest in the euro zone. UK mortgage RWAs equate to 10.3 per cent.