The Irish mortgage market appears better placed to withstand a rise in European Central Bank (ECB) interest rates than it was at the height of the boom, although a small number of homeowners remain vulnerable to even a small rate increase, new research has suggested.
The joint piece of research, published on Tuesday by the Economic and Social Research Institute (ESRI) and the Department of Finance, has found that were ECB interest rates to rise by 0.25 per cent, then around 800 homeowners, or 0.1 per cent of the total mortgage market, would struggle to meet their repayments.
The research also points out that households are still "in a better position to withstand interest rate increases given the stronger economic circumstances in Ireland since 2014".
It says an improved labour market, through lower unemployment and rising incomes, “is particularly important”, but stresses that an ECB rate rise would lead to payments rising faster than long-term income growth which “would likely cause repayment difficulties for some households”.
The research explores which groups are most at risk, and finds that lower income households aged between 18 and 35 who are at an earlier stage in their mortgage contract “are more likely to be affected, as are households on tracker interest rates who have a contractual pass-through from the policy rate to the lending rate”.
Someone with a €300,000 mortgage over 25 years would see repayments climb by around €33 per month in the event of a quarter of a point rate increase.
Were the ECB rate to climb by 1 per cent than the additional costs for many mortgage holders would top €100 per month, and could see more than 3,000 more homeowners struggling to meet their repayments.
Adverse shocks
ESRI researcher Conor O’Toole, who wrote the report, said the mortgage market here had “recovered considerably from the crisis, and households are better placed to deal with adverse shocks”.
He said although the market was in a much better place “to withstand interest rate rises”, vulnerabilities for particular groups of households remain “if interest rates were to rise and inevitably new arrears cases would materialise”.
Mortgage broker and commentator Karl Deeter played down the risks associated with any rate increase, and said the ECB was unlikely to make any moves for at least a year.
He said many of the cohort with tracker mortgages would have paid off a substantial portion of their mortgages at this stage, and would have equity in their homes which would offer them a degree of protection against future shock.
And he said most of the new mortgages being issued have their rates fixed, which would protect new buyers.
“Not only that but all of the loans issued since 2009 have been stressed tested by banks, who have looked very closely at how borrowers would handle a mortgage rate increase of 2 per cent above variable rates, so if those tests are to mean anything then they would mean people are protected against substantial rate increase.”
Mr Deeter pointed out that variable rates on offer in Ireland – which can be as high as 4.5 per cent – were “crucifying people, which is why everybody has been getting fixed rates”.
He said banks were offering five-year fixed rate mortgages for significantly less than 3 per cent, while 10-year fixed rates were on the market for just over 3 per cent.
