The Insurance & Pension - Sovereign Nexus
Different pricing behaviours characterise developments in interest rates across the three categories of mortgage-holding entities. Compared to other entity types, the non-lending non-banks display a higher concentration of loans at both the lower and upper ends of the interest rate distribution. The range of interest rates across their mortgages has also widened markedly since late-2022.
Recent increases in policy rates have put mortgage interest rates in the spotlight once again. As the dominant form of debt held by households, an increased mortgage repayment burden can have significant implications for borrowers in terms of potential financial distress. While the key ECB interest rates increased by 350 basis points between July 2022 and March 2023, official statistics show an increase of just 75 basis points in the average interest rate on outstanding Principal Dwelling House (PDH) mortgage loans over this period. We expect, however, a wide dispersion in exposure to monetary policy changes among mortgage borrowers (Byrne, et al. 2023). Furthermore, the official statistics cover mortgages held in banks only, thereby masking the experience of the cohort of mortgages held in non-bank entities.
The motivation behind this paper is multifaceted. First, it lies in the growing relevance of non-bank entities in the mortgage market. The share of PDH mortgages (in volume terms) held by non-banks has risen from 6.7 per cent at end-2017 to 16.2 per cent by end-2022. This growth reflects the activities of two distinct sub-groups of non-bank entities. The first comprises Retail Credit Firms that are active in new mortgage lending (‘lending non-banks’ hereafter). The second includes Retail Credit Firms and Credit Servicing Firms that only hold and service outstanding mortgage loans transferred from other entities and do not initiate new loans. A key function for these entities (‘non-lending non-banks’ hereafter) is to take on and resolve non-performing loans.
The paper explores contrasting developments and changes in the distribution of mortgage interest rates for banks and non-banks over time, and highlights non-bank mortgages concentrated in the upper end of the interest rate distribution up to March 2023.
The aim of this work is also statistical, originating from the need to fill a data gap to serve the public, given the absence, until recent months, of a regular statistical collection on mortgage pricing by non-banks. This Behind the Data goes beyond the representative statistics described there, to investigate the underlying distribution of interest rates among the population of loans held in non-banks.
The data
The analysis draws on anonymised loan-by-loan data sourced from the Central Credit Register (CCR) and produces experimental statistics elaborating our own workings and estimates. The CCR contains records on loans granted over €500, where the borrower is an Irish resident and/or the loan is governed by Irish law. For the purpose of this paper, we use data on PDH mortgages that are held by the three groups of entities outlined.
Distributional differences exist in mortgage interest rates across the three entity types
In terms of the market composition in March 2023, banks accounted for approximately 80 per cent of the total outstanding value of PDH mortgages, while lending- and non-lending non-banks held shares of 8 and 13 per cent, respectively. For end-March 2023, the Retail Interest Rate Statistics reported weighted average interest rates on PDH mortgages of 3.20 per cent for banks, 3.73 per cent for lending non-banks and 5.36 per cent for non-lending non-banks. Unlike weighted averages, which provide no indication of the degree of variability in rates among the population of loans in each cohort, loan-by-loan data enable a more comprehensive picture of the pricing of outstanding mortgages.
Chart 1 shows the distribution of interest rates for the entity types on a quarterly basis from March 2020 to March 2023.The distribution has been broadly stable over time for the different entities, until late-2022 after ECB rates began to increase and subsequently to pass through to retail rates at varying extent and speed. Lending non-banks’ interest rates have developed around a tighter distributional interval – the range of interest rates on outstanding mortgages is relatively narrow compared to the other entity types. This pattern has largely persisted into the latest data points, reflecting the dominance of fixed rate mortgages among this group. Banks display a narrowing of the distribution since late-2022, as previously low tracker rates moved upwards to levels comparable with other mortgage products. Conversely, the non-lending non-bank rates display a more dispersed pattern in the recent periods, when the range of interest rates across their PDH mortgages widened markedly. This evidence reflects two factors. On the one hand, the overwhelming prevalence of variable and tracker rates among this cohort has exerted upward pressures for a sizable number of mortgages. On the other hand, given the key focus of these entities on non-performing loans, the lower end of the distribution reveals a large cohort of accounts on zero per cent rates (e.g. warehoused loans)