Young borrowers would suffer most from interest rate rise

Young borrowers would suffer most from an interest rate increase, according to new research from the Central Bank, which shows that the average monthly repayment for a 35- to 39-year-old with a tracker mortgage would rise from €760 to €932 if interest rates rose by two percentage points.

The very low share of fixed-rate mortgages in Ireland compared to EU norms means that a greater proportion of Irish borrowers are exposed to interest rate changes, according to the research paper. The 200,000 households with tracker loans have benefited from the period of low interest rates, but are now exposed to the reversal of the process.

The research paper, by Apostolos Fasianos, Reamonn Lydon and Tara McIndoe-Calder, shows the extent to which the disposable incomes of those on tracker mortgages – which are linked to the ECB base rate – are higher than those paying higher standard variable rates (SVRs).

Median disposable incomes after debt for those aged between 35 and 54 are around 26 per cent higher for those on tracker mortgages, compared to borrowers on SVRs.

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ECB interest rates have been at historic lows for some years. Most forecasters do not expect any increases until late next year at the earliest, with many believing it will be 2019 before the first rise comes.

Household income

The Central Bank research says that a 2 percentage point increase in rates would cut average disposable incomes for younger households with tracker mortgages by around 4 per cent. This assumes household income does not change. There would be a similar income hit on those with SVR mortgages for the same rate rise.

Irish households, especially those where the head of household was born from the mid-1960s to the early 1980s, hold a large quantity of debt compared to international norms, the research shows. However, the low interest rate on tracker loans means that debt repayment levels here are in line with international averages. Irish debt is also more related to property, and loans tend to be secured on property assets.