WHEN THERE ARE winners, there are losers.

Last week, we looked at how many Irish savers are getting atrocious returns on their savings.

But if someone’s getting short-changed, then someone else has to be cashing in, right? So, who?

Well, the banks are the obvious ones. Bank of Ireland and AIB each pocketed a cool €1.1 billion in the first half of 2024, a figure regarded as excellent by both firms.

But then there’s the other, slightly less obvious group – mortgage holders. 

During the week, PTSB cut its mortgage rates - the fourth time it has done so in just over a year. The reductions vary depending on the size of your loan and certain other conditions, with rates being lowered by between 0.15% and 0.95%.

For an indication of how big a difference that makes in real terms – someone borrowing €250,000 over 25 years at an interest rate of 4% would have monthly repayments of about €1,320.

At a rate of 3%, the mortgage goes down to €1,185 – a saving of €135 a month. While this may not sound massively impressive, it adds up. 

Over the lifetime of the mortgage, someone paying back the above mortgage on a 4% rate would end up paying about €146,000 in interest on the loan. For someone on 3%, the cost of credit would be €106,000 – a €40,000 saving.

So, it’s a big deal. Even better, PTSB isn’t the only one – AIB and Bank of Ireland have also announced similar price reductions in recent months. Between them, these three firms control the vast majority of Ireland’s mortgage market. 

So their move to cut rates is good news for homeowners.

Irish mortgages still aren’t exactly cheap – according to price-comparison site Bonkers.ie, Ireland has the sixth-highest rates in the eurozone.

However, the gap with our European neighbours is fairly narrow. The average new mortgage rate in Ireland was just under 4% in November, compared to 3.43% across the eurozone.

Rate hikes not passed on

But the situation is much better compared to a few years ago. For example, in September 2021, they were the most expensive in the eurozone, at more than double the region’s average.

Then the ECB started rapidly hiking interest rates in the second half of 2022, quickly being raised by 4.5% in a little over a year. This was done to dampen inflation by making borrowing more expensive, therefore reducing consumer spending.

As bank lending costs are linked to this central ECB figure, the rate hikes caused lenders across Europe to raise the price of mortgage loans.

But Irish banks were actually very slow to pass on the higher prices to customers. This was confirmed in Central Bank research published in late 2023.

So, in about a year, Irish banks went from charging the most expensive rates in the eurozone, to being one of the slowest to pass on rate hikes. And now, they’ve moved quickly to implement rate cuts.

What’s going on? What’s with the newfound benevolence?

Well, it’s worth understanding *why* Irish banks decided not to pass on the ECB’s rate hikes. As Irish consumers save a lot, Irish banks have billions of euro on deposit.

The return that banks get for holding this money depends on the ECB rate.

And as we discussed, up until the middle of 2022, the ECB rate was at 0% – so banks weren’t getting any return.

But then, when the ECB increased its rate, things changed.

As explained previously, Irish consumers typically keep their money in on-demand accounts, where the typical interest being paid out is normally a super-low rate of between 0.1% and 0.2% per year. 

Compare this to the 4% rate banks were getting – AIB, Bank of Ireland and PTSB got to pocket the difference, leading to billions in profits.

Non-bank lenders

This was basically an easy source of money for Irish commercial banks – and put them in a good position to undercut their rivals.

These would be the ‘non-bank’ lenders – basically, financial firms which operate differently to traditional high street banks. These companies tend to be much smaller and more specialised – for example, focusing almost exclusively on small business credit.

In recent years, these non-bank lenders had been muscling in on mortgages. Between 2018 and 2021, their share of the Irish mortgage market surged, going from 3% in 13%. 

This rapid growth came as many of these smaller businesses undercut the triopoly of AIB, Bank of Ireland and PTSB – the Central Bank found that by 2021, these non-banks “had moved to lower average interest rates on new lending than banks”.

Mortgages are the most important business segment for the three high street banks, so these upstarts making headway was likely pretty concerning.

But then, the ECB rate hikes came. And this turned out to be a blessing for these three lenders. 

As we’ve established, AIB, Bank of Ireland and PTSB had lots of money on deposit from their customers, particularly after the savings boom during Covid.

But non-bank lenders are different – they earn most of their money from lending money. Regular customers don’t tend to use them for their savings. 

This meant that when the ECB rate hikes came, non-bank lenders didn’t get an easy cash windfall from their deposits, like the three retail banks did. Instead, they had to up their lending rates.

But, fuelled by this easy deposit cash, the three high street lenders could afford to keep their mortgage rates relatively low. 

This move was helped by the fact that 90% of Irish savings are on-demand accounts paying out basically nothing, despite alternatives being available. This high inertia meant the three commercial banks had little incentive to offer better savings rates while they continued making enormous profits from deposits.

While Irish banks did eventually improve their offers or savers, many of these had some awkward T’s and C’s. They have also been quick to start reducing deposit rates again, with Bank of Ireland being the latest to cut rates on its savings accounts.

What’s next in 2025

Irish banks did of course increase their mortgage prices as the ECB kept hiking rates – but at a slower rate.

Then last year, with eurozone inflation under control, the ECB started cutting interest rates again. This was part of an effort to boost spending and economic growth.

Rates were lowered four times in 2024 by a total of 1% – as we saw, actually quite a significant figure in borrowing terms. About the same – rate cuts cumulatively worth 1% – are expected again in 2025.

This, of course, is the main reason Irish banks have started cutting their own mortgage rates – and why they will likely continue to do so in 2025.

A secondary one to keep in mind is increased competition.

This time, it’s traditional lenders rather than non-banks, which are the concern.

Bankinter, one of the largest banks in Spain, recently launched in Ireland, becoming the first foreign lender to open in the market in well over a decade.

The company has targeted the mortgage market and has grown its loan book strongly in a short space of time.

But the real showstopper is set to be unveiled later this year, when Revolut is expected to start offering mortgages in Ireland.

Claiming three million Irish customers, if the fintech company manages to get any significant number of them to start opening mortgages, Ireland’s three traditional lenders could find themselves in a real dogfight.

So with stronger competition and the ECB planning further rate cuts, Irish mortgages are almost certain to drop in 2025. This also means the return banks get from deposits will fall as the ECB continues to cut rates.

But for now, customer savings are still a lucrative source of cash for Irish banks, which are getting returns of about 3%.

There are other options for Irish consumers, and some have moved their money - overnight deposits dropped by about €4 billion in the year to August 2024. 

But with savings still rising, it hasn’t really been enough to make a serious dent, with about 90% of Irish savings still in these on-demand accounts getting almost nothing back.

While that situation persists, Irish banks will likely take advantage in their battle for the mortgage market.

Basically, consumer deposits were effectively subsidising – at least in part – the better deals on offer for mortgage holders. At least in the short-term, this is likely to continue – good news for homeowners, bad for savers.