Borrowers risk bigger interest rate hikes from non-banks

With the European Central Bank set for its first interest cost hike in July, there’s a risk non-bank interest rates may rise sooner and to a greater degree than those of banks

Fergal McGrath is CEO of mortgage company Dilosk one of the leading non-bank mortgage lenders. Photograph: Frank McGrath

Jon Ihle

May 27 2022 02:30 AM

The growth of non-bank lenders in the market for home loans is potentially exposing more borrowers to faster and bigger interest rate increases, according to new research from the Central Bank.

Non-bank financial institutions (NBFIs) have expanded significantly in the mortgage market in recent years by acquiring loan portfolios from banks and through aggressive sales via the influential broker channel.

Non-bank mortgage lenders, which include Finance Ireland, Dilosk and Avant, currently hold 14pc of all Irish mortgages and grew their market share of new lending from just 3pc in 2018 to 13pc in 2021 – a period of record-low interest rates.

Now with the European Central Bank set to increase rates in July, their funding model makes them more vulnerable than their banking competitors to the cost of finance.

“As NBFIs are more reliant on market funding – unlike banks, which can rely on more stable customer deposits – NBFIs may be more sensitive to global financial market developments,” the Central Bank said.

“As a result, NBFI interest rates may rise sooner and to a greater degree than those of banks.”

Rate sensitivity has been an advantage to non-bank lenders to date, however. They have been able to raise funding cheaply and cut prices on their loans while banks, which have been losing money on customer deposits for years, struggled to maintain margins.

Avant debuted the cheapest mortgage in the market in August 2020 – a key factor in the rapid growth of its mortgage book in the 18 months since. But competitor ICS, a Dilosk brand, has already raised its prices this year in anticipation of a changed interest rate environment.

Non-bank lenders are most exposed to the buy-to-let and refinancing segments of the market and, because they acquired a lot of legacy loans from banks, have half of outstanding arrears cases, so rate sensitivity is a key risk factor.

Yet broker sources said they expect non-banks to confine their rate hikes to the shorter end of their mortgage book, meaning three and five-year fixed rate mortgages will become more expensive but prices on 10 or 20-year loans are likely to remain stable, as these are backed by long-term investors like pension funds.

By contrast, brokers are expecting banks to increase rates across their product range in lockstep with the ECB, which is expected to hike by at least a half point this year.

Meanwhile, the mortgage market is changing in ways that are likely to further strengthen the competitive position of non-banks.

Ulster Bank and KBC are exiting the Irish market, leaving almost a quarter of mortgage business up for grabs.

With mortgage brokers now originating nearly half of all new home loans, non-bank lenders – who get nearly all their business via intermediaries – are set to benefit from the restructuring.

This week Bank of Ireland was ordered by the Competition and Consumer Protection Commission to provide Dilosk and Finance Ireland with €1bn in funding for new lending as a condition for its acquisition of KBC’s mortgage book.