Mortgage cashback offers mean borrowers pay more

By Eamon Quinn

House price increases have transformed the prospects of loan sales by banks, while borrowers are possibly “missing out” on lower home loan rates because of cashback promotions, according to international ratings agency DBRS.

A new report by ratings agency DBRS claims that house price rises have transformed the prospects of loan sales by banks.

With only five large lenders — Bank of Ireland, AIB, Permanent TSB, KBC Bank Ireland, and Ulster Bank — mortgage banks compete “in ways other than price”, it said, highlighting that Irish mortgage costs are among the highest in Europe.

Its report, Irish Mortgage Market Trends, predicts “the likes of Permanent TSB and AIB” will help drive “a significant” amount of sales this year of their non-performing mortgage loans, and that purchasers of the soured loans would have good prospects to securitise Irish mortgages on international markets.

Produced for professionals involved in the residential mortgage loan markets, the DBRS report comments on the “oligopolistic” nature of the Irish banking market.

“Because of this oligopolistic market structure, lenders tend to compete in ways other than price,” states the report.

“Cashback is commonly used as a way of increasing market share without reducing interest rates. For example, 1% to 2% cashback upfront and/or as a portion of monthly installments as well as perks to cover legal and valuation fees are commonly paid to borrowers switching to a new lender.

“Cashback incentives are popular among borrowers; however, it is possible that they are missing out on lower-rate products as a result.”

On the changed nature of the market, the report concludes it is “in the best interest of investors” to work through distressed loans rather than repossess homes, an insight which may alter the debate which has long focused here on the supposed impediments in the Irish legal process.

“A portfolio of


performing assets is more valuable for investors, as opposed to a non-performing portfolio going through repossessions, due to the beneficial cash flow options of the first, it states.

“Investors can receive a steady flow of income and additional interest that can be accrued, as opposed to spending money on legal fees in the court process towards an uncertain pay-out in terms of amount and timing,” said DBRS.

It said purchasers of non-performing mortgage loans (NPLs) from Irish banks will have a “viable exit strategy” because there is a big demand for securitisations. “NPL securitisations are popular choices: From the issuer’s perspective, the low funding cost mean refinancing NPL portfolios and optimising the capital structure is cheap.”


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