Many mortgages vulnerable to ECB interest rate rises

March 12, 2019

New research by the ESRI and the Department of Finance reveals the extent to which households would likely experience mortgage arrears if ECB interest rates were to rise.

As global interest rates are low by both by international and historical standards, they will inevitably rise in the coming years. The research tests how this would affect households in terms of their ability to continue to pay their mortgages. It finds that a 25 basis point increase in the ECB policy rate in any one year would lead to a 0.1 percentage point increase in new missed mortgage payments.

The research notes that households are in a better position to withstand interest rate increases given the stronger economic circumstances in Ireland since 2014. The improved labour market, through lower unemployment and rising incomes, is particularly important. However, rates rises 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. It finds younger (18-35 years), lower income households 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.

Conor O’Toole, ESRI research and author of the report, commented: “The Irish mortgage market has recovered considerably from the crisis and households are better placed to deal with adverse shocks. The market is in a much better place now to withstand interest rate rises. However, our research points to vulnerabilities for particular groups of households if interest rates were to rise and inevitably new arrears cases would materialise. Younger, lower income households who are at an earlier stage in their mortgage contract are more at risk, as are households on tracker rate contracts.”