How much is the bank making on your mortgage?

Irish banks have the largest lending margins in the euro zone, ECB figures show

Banks here  have the fourth-highest margins when it comes to the 27-countries in the EU. The wider the margin, the greater the profitability of the bank.

Banks here have the fourth-highest margins when it comes to the 27-countries in the EU. The wider the margin, the greater the profitability of the bank.

 

Irish banks are making bigger profits on mortgage lending than those in any other euro-zone country, new figures from the European Central Bank show.

An analysis of margins on mortgage lending across Europe, which is the differential between what banks pay out on deposit accounts and earn on loan products, shows that margins of banks based in Ireland are the highest across the 19 countries in the euro zone at 3.1425 per cent.

Banks here also have the fourth-highest margins when it comes to the 27-countries in the European Union. The wider the margin, the greater the profitability of the bank.

The figures come against a background of the ongoing tracker mortgage scandal, in which banks were found to have limited legitimate access to tracker mortgages. The figures can also be looked at in the context of stubbornly high variable rates in Ireland; while rates have been on the slide here, the lowest new business standard variable rate is the 2.95 per cent offered by Haven, while the highest is Bank of Ireland’s 4.2 per cent, according to the Competition and Consumer Protection Commission (CCPC).

Particularly high

The rates seem particularly high when rates across the euro zone remain at zero, and the equivalent across the euro zone is of the order of about 2 per cent.

According to figures compiled by the ECB, margins on mortgage lending in Ireland have soared from 1.205 back at the height of the boom in January 2007, when a highly competitive market drove margins down, to 3.14 in August of this year – when just six lenders were active in the market.

The figures are significantly higher than other euro-zone countries, with banks in second-placed Latvia considerably lower at 2.5775. Across western euro-zone economies margins are even lower again, most notably in Italy (1.25), Portugal (1.34) and France (1.478).

Indeed Irish bank margins are closer to higher-risk eastern European economies that have only recently acceded to the European Union, such as Hungary (4.1), Bulgaria (3.6) and Croatia (3.5). Some analysts suggest that margins need to be higher in Ireland to compensate banks for assuming greater risk due to difficult repossession rules, although the scale of the differential is even greater than even this might suggest.

Cushioning impact

While mortgage rates have continued to tighten here, margins continue to rise, because banks have been cushioning the impact of the decline by cutting deposit rates too, and Irish deposit rates are also now among the lowest across Europe.

This means that, when combined with lower costs of funding and shrinking bad loan balances, banks are getting more profitable. Earlier this year, Bank of Ireland disclosed that its net interest margin, an indicator of the bank’s overall profitability, rose to 2.32 per cent in the first half of the year.

In comparison, Nordic financial group Nordea for example, reported a NIM of just 0.9 per cent for the fourth quarter of 2016, while Royal Bank of Scotland stood at 2.18 per cent for the first half of the year.