Who is most at risk with mortgage rates on the rise again?

Another interest rate increase of 0.25 of a point was announced by the European Central Bank at its meeting on Thursday, bringing rates to their highest level in 22 years in an unprecedently fast tightening cycle.

The speed and scale of the rise, which has taken the ECB’s deposit rate from minus 0.5 per cent last July to 3.5 per to 3.75 per cent has hit many of the State’s 712,000 home loan mortgage borrowers hard. Its refinancing rate – the one from which tracker mortgages are priced – has risen to 4.25 per cent. Here are the groups most affected by the cumulative impact.

1. The trackers

Close to 250,000 mortgage borrowers have tracker loans, almost all taken out before the 2008 crash (there are a small number of renegotiated trackers from later years).

As tracker rates increase directly in line with ECB rates, these borrowers have taken the full brunt of the increase. Tracker rates are set off the ECB refinancing rate now at 4.25 per cent. This means that tracker rates are now above 5 per cent in most cases and many will be paying 5.5 to 5.75 per cent.

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A Central Bank analysis (updated for the latest rate rises) shows that the most exposed 20 per cent of mortgage borrowers – the bulk of whom are on trackers – were already seeing a monthly repayment rise of about €460 a month since last summer and this will rise to about €490 after the latest increase.

While none of the individual increases have been too large, the cumulative impact is very significant and will be approaching €5,900 annually on average for this most-stressed group.

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The loans facing the most significant increases originated between 2004 and 2008, the peak of the Tiger boom, and predictably those with large outstanding balances are most hit. Many others, with significant amounts of their loans paid off, face smaller increases.

An interesting aspect of the Central Bank research is that this tracker group had been on significantly lower repayments than other borrowers for many years and the ECB increases have only now started to move their monthly repayments above those of the other lending groups.

Many of those on old-style standard variable rates will have fixed in recent months, though those who did not – or could not – will face increases as variable rates slowly rise in response to the ECB.

2. The non-bank loans

About a fifth of home loan borrowers have mortgage loans with so-called non-bank lenders. This breaks into two groups: those with loans with the new smaller lenders who have entered the market, some owned by international banks, and those whose mortgages are managed by specialist companies who are managing loans on behalf of international funds.

These funds bought blocks of mortgages from Irish banks in recent years, most of them involving a high proportion of loans in arrears. Recent Central Bank research has shown that there is a variety of interest rates charged by these credit management firms, but a small number of borrowers – about 20,300 – were paying at rates of more than 5.2 per cent last March, when the average rate on all home loans was 3.2 per cent.

More than 5,500 were on particularly high rates of more than 7 per cent. As most were holding loans previously in arrears, many of these borrowers could be expected to be facing difficulties, paying rates well above the market norm. These rates will have risen again since March, with some facing rates of 8 per cent or more.

3. The future shock

The third group of exposed borrowers are among those who have not felt any increase so far. They are those on fixed-interest rate loan deals who are due to roll off these arrangements over the next year or two. Many are relatively new borrowers who have bought at currently high price levels. Bank of Ireland increased its fixed rate offers this week, and the trend in these rates – offering borrowers a chance to lock in again after their current loan period runs out – are now heading firmly upwards.

Nobody knows where ECB interest rates will be, say, by the end of 2024, but it is a fair bet that the interest rates facing these borrowers when they come to renegotiate their loans will be significantly greater than the fixed rates they are now on.

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From a starting point of last December, more than 60,000 borrowers will roll off fixed rate arrangements this year and another 70,000 plus in each of the subsequent two years, according to the Central Bank. They will now face big repayment increases.

Significant numbers will remain protected – by the end of 2024, 40 per cent of total borrowers will still feel no impact.

But bit by bit those on fixed-rate deals will have to re-enter the market at much higher rates, with no prospect the ECB will return to the kind of rock bottom levels seen before the recent rate rises started.