| 2.6°C Dublin

Majority of mortgage holders exposed to rise in interest rates


Most mortgage holders either have a tracker or a variable rate.

Most mortgage holders either have a tracker or a variable rate.

Most mortgage holders either have a tracker or a variable rate.

THE majority of mortgage holders in this country would be exposed to a rise in European Central Bank rates.

This is despite a surge in the number of households taking out fixed rates in the past few years to protect themselves against rising interest rates.

Some 60pc of homeowners are still on a combination of variable and tracker rates, the Central Bank said in its Financial Stability Review 2021.

A 1pc rise in the European Central Bank rate would cost them €140 a month.

Another 13pc of mortgage holders are on a short-term fixed rate that is due to finish in the next three years.

The high numbers on floating rates is despite a rush by mortgage holders to sign up to fixed rates in the last few years.

Fixed rates have been lower than variable rates for a number of years now, with banks encouraging customers to sign up for them.

There is speculation the European Central Bank could be forced to raise its key lending rate, which is 0pc, next year if inflation pressures become persistent.

Inflation in the Eurozone is running at 4.1pc at the moment.

If the key ECB lending rate was to rise by 1pc, it would cost an extra €141 a month for those on variable and tracker mortgages in this country, the regulator has calculated.

Business Newsletter

Read the leading stories from the world of business.

This field is required

This works out an extra €1,700 a year in repayments.

But the Central Bank said this would not severely challenge the ability of most households to meet monthly repayments.

“Based on Central Bank calculations, if interest rates were to rise by 1pc, the average household on a floating-rate mortgage would pay €141.85 extra per month, which represents less than 2pc of the gross median monthly income of households on a floating-rate mortgage.”

It added: “Material shocks to interest rates are unlikely, in isolation, to severely challenge most households’ capacity to service mortgage debt.”

Households have been helped by the fact that mortgage debt relative to the value of homes has fallen sharply since 2013.

Mortgage holders can get a more favourable fixed rate if their debt is low relative to the value of the home.

The fall in loan-to-value ratios means that households are currently are in a better position to absorb adverse shocks, the Central Bank said.

But if interest rates started reversing, there would be an exposure in the Irish mortgage market among those on variable and tracker rate mortgages.

Tracker mortgages are priced at a set margin over the ECB rate, usually 1 percentage point about that rate.

Holders of tracker rates have been strongly advised to hold on to them in the past few years as they have proved good value.

Some lucky tracker rate holders are on rate of just 0.5pc as the ECB rate is 0pc and their margin is just 0.5pc.

Variable rates can be as high as 4.5pc, with homeowners on those rates being constantly advised to opt for a fixed rate from their lender.

Irish mortgage rates are among highest in the European Union.

Average new mortgage rates here are 2.72pc, more than twice the average across the Eurozone.

This means new borrowers here are paying around €2,000 more a year for their home-loan than is typical in the other countries that use the Euro.

Most Watched