Competition to erode rate rise

Amid the talk of rising rates in the euro-zone, it is easy to lose track of the progress Irish mortgages have made in recent years.

A look back to the start of the decade illustrates the point; if you wanted to fix your mortgage for two years at that stage, you faced an interest rate of at least 6 per cent. On a mortgage of €300,000 over 25 years, that meant monthly repayments of roughly €2,000. These days the same fix is less than 4 per cent, implying monthly repayments of about €1,500 - saving €6,000 a year. We have the euro, rather than the benevolence of domestic lenders, to thank for the change.

Lower interest rates were the required companion of the new single currency, whether banks and building societies liked it. Happily for the lenders, falling rates and the declining margins that may have come with them were accompanied by a property boom. This meant that the monetary value of mortgages exploded, allowing financial institutions to absorb any erosion of mortgage margins more easily.

The question now, in the face of rising rates, is how much more space, if any, mortgage lenders have to reduce their margins further and by doing so provide a better deal for borrowers. Help in answering this question comes from a report by Davy, the stockbroking firm. The truth underlining the report is that "Irish mortgage lending remains very profitable". Davy also finds that average mortgage spreads (or margins) appear to have "held up" to date. The broker notes that it is "inevitable" that spreads must reduce at some stage in the future.

The reasons? Well, the broker says changing product mix, more remortgaging and competition will drive the development. "What remains uncertain is the speed of the decline or where it will end," Davy notes.

As far as remortgaging goes, the broker says the trend is based on changing circumstances. Where first-timers historically stayed in their properties for several years, they now tend to trade-up (and remortgage) more quickly. Over time, according to some players quoted by Davy, remortgaging has the potential to capture 40 per cent of the overall mortgage market, compared to 25 per cent at the moment.

More remortgaging at lower rates will mean that loans on historic, higher rates will become rarer. This means that customers who could now access cheaper rates but choose not to do so will finally make the move. It does not, however, imply any great new effort on behalf of lenders.

What could lead to tighter spreads and, simultaneously, better value for consumers, is the aforementioned competitive push. Already, Dankse (the bank that bought National Irish Bank earlier this year) has made its presence felt on rates but, as Davy notes, there has been no "knock-out blow" as yet. There is still time.

"One clear message coming from the incumbents is that they intend to meet the competition head on," Davy notes. Perhaps unfortunately for borrowers, however, the broker expects that this facing-off strategy should mean the market will not begin to generate "irrational" pricing. In other words, free mortgages will not be on the agenda. Cheaper mortgages (or tighter spreads) could however be coming our way, just in time to ease the pain of any euro-zone rate hike.