The growth of non-bank lenders in the home loan market is potentially exposing more borrowers to faster and bigger rate hikes, according to a new study by the central bank.
On-bank financial institutions (NBFIs) have expanded significantly in the mortgage market in recent years, acquiring loan portfolios from banks and making aggressive sales through the influential broker channel.
Non-bank mortgage lenders, including Finance Ireland, Dilosk and Avant, currently hold 14% of all Irish mortgages and increased their new lending market share from just 3% in 2018 to 13% in 2021 – a time of record low interest rates.
With the European Central Bank set to hike rates now in July, its funding model makes it more vulnerable than its banking peers to funding costs.
“Because NBFIs are more reliant on market funding – as opposed to banks, which can rely on more stable customer deposits – NBFIs could be more sensitive to global financial market developments,” the central bank said.
“As a result, NBFI interest rates could rise earlier and more sharply than banks.”
However, interest rate sensitivity has so far been an advantage for non-bank lenders. They have been able to raise cheap finance and lower the prices on their loans, while banks, which have been losing money on customer deposits for years, have struggled to maintain margins.
Avant introduced the cheapest mortgage on 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 prices this year in anticipation of a changed interest rate environment.
Non-bank lenders are most exposed to the buy-to-let and refinance segments of the market and, having purchased many legacy loans from banks, account for half of the outstanding arrears, making interest rate sensitivity a key risk factor.
However, broker sources said they expect non-banks to limit their rate hikes to the shorter end of their mortgage books, meaning three- and five-year fixed-rate mortgages will become more expensive, but prices for 10- or 20-year loans are likely to remain stable as these supported by long-term investors such as pension funds.
In contrast, brokers expect banks to hike rates across their product range in step with the ECB, which is expected to rise by at least half a 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 open.
With mortgage brokers now originating almost half of all new home loans, non-bank lenders – who conduct almost all of their business through intermediaries – will 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 financing for new loans as a condition of acquiring the KBC mortgage book.
https://www.independent.ie/business/personal-finance/borrowers-risk-bigger-interest-rate-hikes-from-non-banks-41693786.html Borrowers risk larger rate hikes from non-banks