The mortgage price war, which has seen the State's three biggest lenders slash their variable rate mortgages to under 4 per cent, may result in a major shake-out among the dozen institutions offering mortgages to Irish homebuyers, according to the chief executive of Irish Life & Permanent, Mr David Went.
Speaking after Irish Life & Permanent cut its variable mortgage rate to 3.99 per cent - matching the rates on offer from AIB and newcomer Bank of Scotland and nearly equalling Bank of Ireland's 3.95 per cent rate - Mr Went said: "It's clear that some of the competition will find it difficult to live with these sort of margins and it's clear there will be a shake-out. I don't know how many will be involved in the shake-out." Mr Went added that any mortgage lender with less than 510 per cent of the market will find it very difficult and that "even those in the mid-teens market share with high costs will also find it difficult".
He would not indicate who exactly might be involved in any shake-out of the Irish mortgage market, but industry sources believe that the two remaining building societies - EBS and Irish Nationwide - are the most vulnerable.
Irish Life & Permanent itself has a market share in mortgages of just under 23 per cent.
While a smaller bank like First Active stands to lose around one-third of its profits if it matches the rate cuts at AIB, Bank of Ireland and Irish Life & Permanent, First Active at least has 45 per cent of its mortgage book in Britain. EBS and Irish Nationwide are almost totally dependent on mortgage lending in the Republic. One analyst said the big problem facing mutual societies was that they risked damaging their capital adequacy if they reduced margins to the level now accepted by the three big banks.
"Can they aggressively try and keep market share by cutting their rates? If they can't, the big banks will move in to try and snap up some of their market share," he added.
He was non-committal on whether the reduction in margins would accelerate the demise of the mutual societies, but added that Irish Nationwide now had a more plausible case to press for changes in the legislation governing building society mutualisations - particularly the five-year take-over-proof period - than it had in the past.
Irish Life & Permanent's decision to match the 3.99 per cent rate offered by some of the other lenders will cost the recently-merged bancassurer £15 million (€19 million) in pre-tax profits (£11.5 million after-tax) on an annualised basis.
"The key issue going forward is living with reduced residential mortgage margins. Mortgages are critical to our strategy in Ireland," said Mr Went.
With a variable rate mortgage book of €2.5 billion, the total cost of bringing its rates to 3.99 per cent is €31.2 million.
But Mr Went said that 0.25 percentage points of the 1.25 percentage point cut in the past week represented margin that would have been inevitably lost as Irish interest rates fell to euro levels.
He added that the ongoing loss of margin was costing €25 million, but that €15 million of this had already been covered by cost reductions in the merged business. "That leaves €10 million to find and I believe we can find that," he said.
"The margin we are now getting is reasonable and is sustainable, and we can also sell on service," he said, adding that "a centralised lender in Scotland will find it very difficult to deliver a mortgage cheque to Ballyhaunis in six hours".
"We're fortunate in dealing with this issue on a number of levels, and the strength of the merged group gives scope to compete at these prices. There will be a fundamental impact on some players in the mortgage market, but we're fortunate that we're well-placed to take advantage of the inevitable shake-out in the market."
Commenting on Irish Life & Permanent's decision to confine its first rate cut to 0.5 per cent after Bank of Scotland entered the market, Mr Went said: "Our cut then was a reasonable response, but when AIB and Bank of Ireland - our main competitors with strong brands and distribution - moved, we had to move to protect ourselves. We want to be one of the dominant players."
On AIB and Bank of Ireland's move to match or undercut Bank of Scotland at a single stroke, Mr Went commented: "It appears they want to burn out the competition before it gets going." He rejected suggestions that, by delaying interest rate cuts until now, mortgage lenders like Irish Life & Permanent had engaged in profiteering at the expense of borrowers.
"It was inevitable this would happen; the question was when. I don't accept that these cuts in rates wouldn't have happened if Bank of Scotland had not entered the market," he said. He added that Irish Life & Permanent's decision not to raise its fixed rate mortgages after its competitors had raised theirs in recent weeks meant that it had £40-£50 million worth of mortgages that were currently not economic.
