One in 25 healthy mortgages may default in shock scenario

Nearly 4 per cent of Irish mortgages taken out before the crash could default in the event of a financial shock, according to a new study.

The research, published by the Central Bank, assessed the vulnerability of mortgaged households here to a hypothetical shock, involving a 4 per cent decline in property prices; a 1.1 per cent increase in interest rates; and a 3.3 per cent rise in unemployment over a three-year period.

The adverse scenario was based on a 2016 stress test used by the European Banking Authority.

The study, which used data relating to 533,589 owner-occupier mortgages, found that some 3.9 per cent of loans taken out between 2004 and 2009, which are currently not in arrears, could default in such circumstances. This equates to just under 8,000 loans.

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In contrast just 2 per cent of mortgages that originated after the crash, corresponding to just over 100 loans, were likely to be put at risk of defaulting under the same scenario.

The study also found that households with a high current loan-to-value (LTV) ratios were vulnerable to a shock.

Under the adverse scenario, some 18 per cent of such loans were at risk of default. The default risk was found to rise in tandem with the level of negative equity.

The research also found that households with multiple loans were slightly more vulnerable than those with single loan facilities.

Regional differences

Mortgage-holders in the Border, midland and southeast regions were also slightly more vulnerable to the adverse scenario compared with other regions, reflecting weaker levels of economic recovery being experienced in these regions.

The report – entitled A Vulnerability Analysis for Mortgaged Irish Households – noted that since 2013 the Irish economy had experienced a recovery with unemployment falling, domestic demand growing strongly, house price growth and a decline in the number of non-performing loans and mortgage arrears.

However, despite this progress, it said some households remain vulnerable to domestic and external shocks.

“The analysis highlights that segments of households are particularly susceptible to economic shocks,” the report’s author Vasilis Tsiropoulos said in his conclusion. “In particular, borrowers with high LTV ratios, date of origination between 2004 and 2009 and multiple loans are found as the segments that are relatively more vulnerable to adverse shocks,” he said.

Central Bank governor Philip Lane recently warned that house prices here could fall in the near to medium term for a number of reasons, including a big housing supply response or as a result of higher interest rates or a disorderly Brexit.