The Central Bank’s latest Financial Stability Note provides useful insights into the increasing role (in line with global trends) played by non-bank lenders (NBLs) in the Irish mortgage market.

Depending on whether they are originating, holding and/or servicing debt, Irish NBLs require authorisation by the Central Bank of Ireland as retail credit firms, or credit servicing firms.

The Note highlights the important role played by NBLs in driving competition (particularly on price, during the recent low interest rate period), having fulfilled borrower demand when retail banks lowered credit supply, and meeting investor appetite for higher yields. While NBLs are reliant on market-based funding, which can make their funding costs more volatile than the deposit bases available to retail banks, they are not subject to the same stringent capital requirements. And while banks may be perceived as being subject to more intrusive supervision, NBLs operating in Ireland still require regulation, and are subject to the same financial conduct and consumer protection obligations. The fact that the Irish mortgage measures (currently being reviewed by the Central Bank) apply at product-level rather than at entity-level also “ensure a “level playing field”…in their implementation”. While the Note flags that NBLs’ market participation could “increase cyclical pressures in the good times, and exacerbate reductions in credit supply to the real economy during downturns”, the Note’s authors commented that the product-level mortgage measures somewhat mitigate the cyclical pressure risk.

Notable Statistics: Mortgage Stocks 

NBLs held 14% of all Irish primary dwelling-house (PDH) mortgages, and 52% of all Irish PDH mortgages in arrears, at the end of 2021. For buy-to-let (BTL) mortgages, recent statistics confirm that NBLs held 31% of all Irish BTL mortgages at the end of 2021 (and 70% of all Irish BTL mortgages in arrears).

Notable Statistics: New Lending

NBLs market share of new mortgage lending increased from 3% in 2018 to 13% in 2021. That lending is concentrated in the BTL (31%) and refinance (29%) sectors. New mortgage lending by retail banks is more concentrated in the first-time buyer (FTB) and second-and-subsequent (SSB) sectors. NBLs account for 10% of new lending in the FTB and SSB sectors (and those sectors total 85% of the Irish mortgage market). The exits of KBC and Ulster Bank from the Irish market may lead to further FTB and SSB activity in the NPL space.

95% of new bank lending by NBLs is originated via mortgage brokers (compared to 32% for retail banks, where there is still a branch network). The growing trend, post COVID-19, towards the digitalisation of financial services (such as the mortgage origination process) may erode the branch model further, and the use of broker channels is likely to increase competition.

Interestingly, NBLs are not seen as engaging in ‘riskier’ lending. The Note indicates that NBL lending is very similar to retail bank lending in the FTB and SSB sectors. While NBLs (on average) lend to slightly lower-income borrowers, the property values, loan-to-income (LTI) ratio, loan-to-value (LTV) ratio and borrower age profiles are very similar as between NBLs and retail banks. The geographic spread is slightly different, with 41% of new NBL loans relating to Dublin properties, compared to 30% for banks (who have a national branch network). The profile alters slightly for NBL-funded refinancings, where the property is 11% more likely to be in Dublin. NBLs avail of the LTI and LTV allowances in the mortgage measures framework less frequently than the retail banks.

The statistics on interest rates are also worth noting. NBLs have reduced interest rates to a greater degree than retail banks across the FTB, SSB and BTL sectors since 2018, and tend to issue more fixed-rate loans, and loans with slightly longer fixed periods. NBL mortgage loans also have, on average, marginally shorter terms. The Note questions whether inflation, and more expensive market-funding, will lead to NBLs increasing mortgage interest rates more quickly than retail banks.

The Note from the Central Bank re-enforces the importance that NBLs have played and will continue to play in the Irish market. With the upcoming exits from the retail banking sector it is even more important for competition that NBLs thrive.