The constituents of the Irish mortgage rate

Brendan Burgess

Founder
Messages
45,694
I was forwarded a note by Goodbody Stockbrokers which I thought was interesting - I had not seen the analysis before.

Our prior research shows that the average funding cost for the banking sector is 40bps (including cashback cost), the average Opex is 105bps, the average impairment charge equates to 20bps and the capital charge is 50bps. This leaves a profit market of 47bps, equivalent to ROEs of <20%, similar to peers in Europe. As such, the key delta going forward we think will be opex (banks have cost save programmes in place) and the capital charge as new lending on lower RWAs and underwritten under the macro prudential rules replaces legacy loans with higher RWAs. On the latter, c.33% of mortgages have been underwritten under the macroprudential rules and is expected to climb to c.50% by end 2023 and then c.65% by end 2025. This could see rates drift down but ROEs remain unchanged.

Eamonn Hughes

Financials Analyst

This is my table from the above:

1637921219734.png

Brendan

 

Coldwarrior

Registered User
Messages
379
It'd be interesting to compare this breakdown with a country with low mortgage rates like Germany or Portugal. I'm assuming the biggest differences between them and the Irish rates are in the capital and impairment charges. Those alone wouldn't make up the full difference in rates though, guessing the European banks are more efficient and spent less on OPEX too?
 

Brendan Burgess

Founder
Messages
45,694
Hi Gordon

The banks keep shouting how much extra capital is required

I think it suggests that Irish rates should be about .5% above eurozone rates to allow for the extra capital costs.

This is a point I have often made, Irish mortgages should be a bit dearer but not twice the rate.

Brendan
 

Gordon Gekko

Registered User
Messages
5,870
Hi Gordon

The banks keep shouting how much extra capital is required

I think it suggests that Irish rates should be about .5% above eurozone rates to allow for the extra capital costs.

This is a point I have often made, Irish mortgages should be a bit dearer but not twice the rate.

Brendan
Would ‘impairment’ and ‘funding’ not also be impacted?
 

Dublinbay12

Registered User
Messages
653
Do we know what the capital charge is now under new underwriting rules? My understanding previously was that RWA models for Irish banks required larger capital holdings vs European peers. So even under new mp underwriting rules the capital charges required by Irish banks was larger than european counterparts.
 

time to plan

Registered User
Messages
352
Hi Gordon

The banks keep shouting how much extra capital is required

I think it suggests that Irish rates should be about .5% above eurozone rates to allow for the extra capital costs.

This is a point I have often made, Irish mortgages should be a bit dearer but not twice the rate.

Brendan
Twice the rate isn't a helpful metric in my opinion. 0.2% is twice the rate of 0.1%, as is 20% twice the rate of 10%. The former is not worth even considering.
 

NoRegretsCoyote

Registered User
Messages
3,447
Over 25 years my mortgage balance will average about €180k. At 105 bp opex that' s €1900 a year in cost to the bank. This seems massive for the work involved.

There was upfront underwriting of course. But after that there are direct debits and a few automated letters and a phone call every year to pick a fixed rate.
 

rob oyle

Registered User
Messages
672
I was forwarded a note by Goodbody Stockbrokers which I thought was interesting - I had not seen the analysis before.

Our prior research shows that the average funding cost for the banking sector is 40bps (including cashback cost), the average Opex is 105bps, the average impairment charge equates to 20bps and the capital charge is 50bps. This leaves a profit market of 47bps, equivalent to ROEs of <20%, similar to peers in Europe. As such, the key delta going forward we think will be opex (banks have cost save programmes in place) and the capital charge as new lending on lower RWAs and underwritten under the macro prudential rules replaces legacy loans with higher RWAs. On the latter, c.33% of mortgages have been underwritten under the macroprudential rules and is expected to climb to c.50% by end 2023 and then c.65% by end 2025. This could see rates drift down but ROEs remain unchanged.

Eamonn Hughes

Financials Analyst

This is my table from the above:

View attachment 5915
Brendan
If I remember right, NAMA paid 9b.p. to covered banks to administer the loans taken on from the banks (at the start of the process anyway)... lean margins there!
 

SPC100

Registered User
Messages
948
We would need to know what is in Opex cost. Itmight include some percent of staff. Rent, light, Elec etc
 

Baby boomer

Registered User
Messages
541
Over 25 years my mortgage balance will average about €180k. At 105 bp opex that' s €1900 a year in cost to the bank. This seems massive for the work involved.

There was upfront underwriting of course. But after that there are direct debits and a few automated letters and a phone call every year to pick a fixed rate.
Yeah, that struck me as way out of line.
 

Gordon Gekko

Registered User
Messages
5,870
Surely ‘OPEX’ includes rent, staff, risk, legal, compliance, marketing…everything basically.

It’s not the marginal cost of issuing one more mortgage.

It’s the costs of operating a lending institution basically.
 
Last edited:

Horatio

Registered User
Messages
313
Over 25 years my mortgage balance will average about €180k. At 105 bp opex that' s €1900 a year in cost to the bank. This seems massive for the work involved.

There was upfront underwriting of course. But after that there are direct debits and a few automated letters and a phone call every year to pick a fixed rate.
Yes that does seem obscene. A like for comparison with another EU player would be interesting as mentioned above.
 

mojoask

Registered User
Messages
250
Assuming profit margin is at least equal in other countries, what would be the conclusion? Capitalisation requirements keeping out the competition?
 

skrooge

Registered User
Messages
449
Assuming profit margin is at least equal in other countries, what would be the conclusion? Capitalisation requirements keeping out the competition?

Partly, I'd say they look at Ireland and see the rates charged but then look at our default rates and cost/odds associated with repossessing property here. The risk adjusted return may not look so good.

The higher risk is also reflected in the capital requirements
 

mojoask

Registered User
Messages
250
Partly, I'd say they look at Ireland and see the rates charged but then look at our default rates and cost/odds associated with repossessing property here. The risk adjusted return may not look so good.

The higher risk is also reflected in the capital requirements

Default rates I would assume are included in the impairment costs listed above? Based on what's reported in the media, I'd have expected those to be much higher for Irish institutions.
 

Brendan Burgess

Founder
Messages
45,694
While capital costs in Ireland may be high surely capital costs in other eurozone countries are not zero

OK, a maximum of .5% above the eurozone average.

My point is that the banks all say "Look at our very high costs of capital in Ireland. That is why rates are so high."

But if our capital costs are .5% , then that is the most they should exceed the eurozone average by.

Brendan
 

NoRegretsCoyote

Registered User
Messages
3,447
Irish Times has more detail on this today:

The average interest rate on a new mortgage in the Republic, 2.72 per cent as of September, is the second-highest in the euro zone and more than double the currency bloc’s average rate.

An analysis by Goodbody Stockbrokers in July said the capital charge in the Republic on a bank home loan equates to 0.5 percentage points of a mortgage rate, 2.6 times the EU figure. Irish funding costs, at 0.4 points, are almost a third higher, while loan impairment charges account for 0.2 points locally, compared to 0.12 across the EU.

But the real difference is in running costs, including staff, IT spending, levies and other general overheads. The stockbroking firm estimated that operating costs account for 1.05 points of the average Irish mortgage rate, compared to 0.65 points across the EU.

The main difference (proportionately at least) is in the operational expenditure and the capital.
 
Top