People with tracker mortgages vulnerable to rises in interest rates despite low cost loan
People with tracker mortgages are highly vulnerable to rises in interest rates despite having a low-cost loan.
This is because those under the age of 44 borrowed heavily during housing boom, loading up on debt.
A new Central Bank study shows younger mortgage borrowers have the highest levels of debt.
And those who borrowed heavily during the boom have managed to pay down very little of their mortgage debt compared with middle-aged and older borrowers.
Borrowers born after 1970 have just managed to get their debt levels down by 13pc.
In contrast, those over the age of 55 have seen their debts fall by a third.
Older people typically have a mortgage over 20 years, compared with younger borrowers who have 30 and 35-year home loans.
The research states: “The main reason for greater deleveraging by the older group is their lower debt levels and shorter remaining mortgage maturities…”
Borrowers under the age of 44 took young longer-term mortgages, borrowed larger amounts and bought at or close to the peak in prices.
Younger borrowers have also seen a slower recovery in their disposable income since the economic shock that started in 2008, according to the research from the Central Bank.
“Relative to young and middle borrowers, older borrowers saw faster income growth between 2005 and 2008,” the research by Tara McIndoe-Calder finds.
All those in the workforce were hit by job losses, pay cuts and higher taxes, the report notes.
Some 40pc of those under the age of 44 who have a mortgage are on a good-value tracker rate. Tracker rates move at a set percentage when European Central Bank rates go up or down. The current ECB rate is 0pc, with most trackers set at 1 percentage point over the ECB rate.
Repayments on a typical tracker are down 34pc since 2008, according to the Central Bank research.
Variable rates are down by just 9pc in the same period.
Despite having the cheapest mortgages, people on a tracker rate are highly vulnerable when ECB rates start rising, the research finds.
This is because they are heavily in debt and have long-term mortgages.
“Future interest rate increases will likely result in repayment increases for all variable rate borrowers, those on tracker rates are particularly vulnerable however, as they have relatively high outstanding debt levels and their incomes are recovering only slowly,” the study states.
Young borrowers accumulated debt faster than their income grew in the leading up to the housing crash in 2008.
Borrowers who are now in their late 40s and 50s tended to top-up their mortgage to acquire a buy-to-let.
Older borrowers were less enthusiastic about buy-to-lets. Their debt levels have not changed, but their incomes have risen.