Majority of mortgage creditors exposed to rising interest rates

The majority of mortgage holders in this country would be exposed to a hike in rates from the European Central Bank.

This is despite a sharp increase in the number of households subscribing to fixed rates in recent years to protect themselves against rising interest rates.

Some 60% of homeowners still apply a combination of variable rates and tracking rates, the central bank said in its 2021 Financial Stability Review.

A 1 pc hike in the European Central Bank’s rate would cost them € 140 per month.

13% of mortgage holders have a short-term fixed rate that is expected to end within the next three years.

The high numbers on variable rates are despite a rush by mortgage holders to take out fixed rates in recent years.

For several years, fixed rates have been lower than variable rates, with banks encouraging customers to take them out.

There is speculation that the European Central Bank may be forced to raise its policy rate, which is 0pc, next year if inflationary pressures become persistent.

Inflation in the euro zone is currently 4.1 pc.

If the ECB’s key rate were to increase by 1pc, it would cost an additional € 141 per month for those with variable and tracker mortgages in this country, the regulator calculated.

This represents an additional € 1,700 per year in reimbursements.

But the central bank said that would not seriously jeopardize the ability of most households to cope with monthly repayments.

“According to the calculations of the Central Bank, if interest rates increased by 1pc, the average household on a variable rate mortgage would pay an additional € 141.85 per month, which is less than 2pc of gross monthly income. median of households on a variable rate. mortgage rate.

He added: “Large shocks to interest rates in isolation are unlikely to seriously undermine the ability of most households to service mortgage debt. “

Households have been helped by the fact that mortgage debt relative to home values ​​has fallen sharply since 2013.

Mortgage lenders can get a lower fixed rate if their debt is low relative to the value of the home.

Falling loan-to-value ratios mean households are currently in a better position to absorb adverse shocks, the central bank said.

But if interest rates started to reverse, there would be exposure to the Irish mortgage market among those to variable rate and tracker mortgages.

Tracker mortgages are priced at a fixed margin over the ECB rate, typically 1 percentage point over that rate.

Holders of tracker rates have been strongly advised to hold them over the past few years because they have turned out to be attractive.

Some lucky tracking rate holders have a rate of only 0.5 pc, because the ECB rate is 0 pc and their margin is only 0.5 pc.

Variable rates can be as high as 4.5%, with homeowners on these rates being constantly urged to opt for a fixed rate from their lender.

Irish mortgage rates are among the highest in the European Union.

The new average mortgage rates here are 2.72 pc, more than double the euro area average.

This means that new borrowers pay around € 2,000 more per year for their mortgage than is typical in other countries that use the euro.

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