Mortgage market update: lenders have large margins

Dan White authored a piece published in the Irish Independent on June 18 titled: Are greedy mortgage lenders about to see enormous margins squeezed? The article analyses the current mortgage market and concludes that limited competition between lenders is a source of high interest rates in the market and the consequently high margins and profits achieved by lenders. White takes note of current changes in bank’s interest rates and of a paper published by the Competition and Consumer Protection Commission to predict the future of interest rates and margins in the mortgage market.


The author cites a paper published by The Competition and Consumer Protection Commission stating that the Irish mortgage market is “characterised by a high concentration of a small number of lenders, limited competition between these lenders and low levels of entry by new players”. This is in part due to the fact that many foreign lenders left the Irish market after the crash. Because of the limited competition, Irish banks had free range to dramatically increase their net interest margin in recent years. AIB’s net interest margin rose to 2.42% last year from a low of 1.22% in 2012 and Bank of Ireland’s margin similarly climbed to 2.27% last year from its 2012 low of 1.25%.


While these figures signal profitability and lower amounts of bad loans, they also act as evidence to call for greater competition in the market in order to facilitate growth in home ownership. While the average rate on Irish mortgages is 3.19%, compared to just 1.72% across the EU, recent developments such as Bank of Ireland’s decision to cut mortgage rates and Australian lender Pepper money’s entrance into the residential mortgage market do signal the heating up of competition within the market.


Despite this and various changes urged by the Competition and Consumer Protection Commission, the author of this article is still unconvinced that there will be sufficient competition. For both Bank of Ireland and AIB, mortgages account for more than half of the total amount of loans, and the government may be unlikely to take initiatives that result in lower mortgage rates because of its large stake in these and various national banks. Overall, a reduction in the Irish mortgage interest rates to the EU average would lower net interest margins dramatically as to cost AIB and Bank of Ireland as much as €435 million and €360 million a year respectively.

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