Non-bank lending to mortgage borrowers has grown in importance in recent years

• Non-bank lenders now account for 13% of the new mortgage lending market.
• Non-banks account for 10% of new lending to first-time buyers and second-time and subsequent buyers. The profiles of these borrowers are very similar across retail banks and non-banks.
• Non-banks appear to play an important role in enhancing competition on interest rates for consumers, but may increase rates more quickly than banks due to their different funding structure.

The Central Bank has today published a Financial Stability Note, “Non-bank mortgage lending in Ireland: recent developments and macroprudential considerations”. Authored by Edward Gaffney, Christina Hennessy, and Fergal McCann, the Note examines the growing role of non-bank financial intermediaries (NBFIs) in the Irish mortgage market since 2018. The Central Bank has heightened its focus on the evolution and risk profile of NBFI lending in recent years. Previous Central Bank research has found that around 28% or €1.6bn of SME lending in 2020 was provided by NBFIs. In addition, total lending growth of almost €1bn between 2019 and 2021 in the mortgage market is attributable almost entirely to NBFIs. This heightened focus is therefore particularly important in the context of the Central Bank’s mandate to protect financial stability.

The Note highlights that NBFI lending may differ from bank lending in ways that benefit the real economy. NBFIs can provide credit to borrowers less likely to be served by traditional banks. They can also stimulate competition between lenders; lowering borrowing costs and increasing credit supply. NBFIs also bring diversification benefits to the financial system. However, there are some potential risks from a financial stability perspective. In the Irish context, NBFIs engaged in new mortgage lending are regulated as Retail Credit Firms (RCFs). RCFs and retail banks are equally subject to financial conduct and consumer protection requirements, and RCF lending is also regulated under the Central Bank of Ireland’s macroprudential mortgage measures. However, RCFs and NBFIs are not subject to the same regulatory capital requirements (such as the risk-weighted asset regime) as banks. Overall, the Note points out that NBFI participation across a range of lending markets can mitigate the risk of a single, systemic event undermining financial stability – as occurred during the Global Financial Crisis. NBFIs are likely to increase cyclical pressures during times of economic expansion, but may exacerbate declines in credit supply during downturns.

Looking more closely at the Irish mortgage market, the Note finds that non-banks now hold 14% of total mortgages in Ireland, including 52% of mortgages in arrears. This trend is largely attributable to the sale by Irish banks of non-performing loans to NBFIs over the last decade. By contrast, new lending is largely carried out by a mixture of RCFs funded directly on financial markets and entities with links to overseas parent banks.

Non-banks’ share of new mortgage lending has grown from 3% in 2007 to 13% in 2021. Despite this rapid recent growth, new lending by banks continues to dominate the mortgage market. Non-banks account for close to 30% of new lending in the buy-to-let (BTL) and refinance markets, but only 10% of the larger first-time buyer (FTB) and second-time and subsequent buyer (SSB) segments (which, combined, account for 85% of new mortgages since 2015). However, the Note suggests this segmentation may evolve following the departure of two significant lenders from the Irish market in 2022.

Looking at the profile of FTB and SSB borrowers, the Note finds that non-bank lending to such borrowers is very similar to bank lending. Non-banks lend to slightly lower-income borrowers on average, but property values, loan-to-income ratios, loan-to-value ratios, and borrower age are close identical. The Note highlights one key difference between non-banks and banks – namely, the way in which borrowers interact with the firm. 95% of non-bank loans are intermediated through brokers or tied agents, compared with just 32% for banks.

Finally, the Note considers the role of non-banks in price competition for consumers. Since 2018, non-banks have reduced prices by substantially more than banks. By 2021, non-banks had lower average interest rates than banks in all segments of the market except refinance. However, the Note underlines, the changing customer base and the different funding model of NBFIs are important factors. As NBFIs are more reliant on market funding – unlike banks, which can rely on more stable customer deposits – NBFIs may be more sensitive to global financial market developments. As a result, NBFI interest rates may rise sooner and to a greater degree than those of banks.

Notes to Editor

“Non-bank mortgage lending in Ireland: recent developments and macroprudential considerations” uses granular Central Bank of Ireland data to provide new insights on the evolution of non-bank market shares within specific segments of the mortgage market, the composition of borrowers relative to banks, and interest rate pricing.

For the purposes of this Note, NBFIs are defined as those entities lending to domestic borrowers without a retail banking licence. Where the Note refers to new mortgage lending, all entities are regulated as Retail Credit Firms (RCF). Where statistics are provided relating to outstanding loan amounts, a combination of RCFs and Credit Servicing Firms are included in the data.

Financial Stability Notes – full series