Which Irish mortgage borrowers are most exposed as interest rates rise?

New figures this week showed the major banks have been slow to pass on ECB interest rates increases – the average rate on a new loan actually edged lower in September. So far, the main lenders have not increased their standard variable rates; AIB has pushed up fixed rates for new borrowers, by half a point and Bank of Ireland by a quarter of a point. The big players can do this because they have large amounts of cash on deposit on which they are still paying little or no return to savers. Some of the smaller players have increased rates much more significantly, effectively pricing themselves out of the market for now in some cases.

This has left the focus on borrowers with tracker mortgages, where interest rates increase automatically with ECB rates, which have already increased by two percentage points in three jumps, with more to come. Sinn Féin has gone as far as asking the Government to consider new interest relief for these mortgage holders. But is it tracker borrowers who are really vulnerable, or are other categories of borrowers now exposed?

One group in particular will face big increases – and that is people with large, newer mortgages whose fixed rate terms will end over the next couple of years.

The Trackers: Around 300,000 borrowers are on tracker rates and Central Bank figures show that there is around €20 billion of tracker-related debt outstanding. Those loans, by definition, were initiated before 2008 – some people will have taken on additional debt as they moved house in the meantime. Tracker holders had the golden ticket in the Irish mortgage market for a long time as Central Bank rates hit historic lows after the crash and stayed there as inflation remained low. The average outstanding balance is – based on the rough headline figures – less than €70,000 and while the average in this case only tells us so much, it does indicate that a lot of those loans are into the second half of their term. Even with the ECB deposit rate – the rate from which trackers are priced – at 2 per cent, those with a margin over ECB of 1 to 1.5 per cent still have rates which are low by historical standards.

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There are exceptions. Mortgage broker Michael Dowling of Dowling Financial points to a group who have trackers with a larger margin over the ECB rate, up to 2 percentage points or more in some cases. For these people interest rates are already approaching or have already hit 4 per cent and will likely go higher in 2023.

Some people on trackers are looking at fixing – the sums depend on the ECB margin of the loan, the outstanding time left on the loan and the borrower’s circumstances. Those considering giving up a tracker are advised to talk to an independent broker to understand the decision and the different conditions which can apply on fixed rate loans in areas such as early repayment.

Borrowers on standard variable rates – typically again an older group with smaller balances – have been advised now for some months to consider moving to fixed rates, which will at very least save money for a few years. While some fixed rate offers are now off the table, it is still worth examining the options, and doing so quickly.

Rolling off fixed rates: In the UK, the sharp jump in mortgage rates has put a focus on those rolling off low fixed rates. Around one in five of all UK mortgage borrowers will have to refinance as fixed rate terms end next year and the recent sharp rise, and volatility, in rates led to estimates that for many repayments could rise by as much as 70 per cent, or hundreds of pounds in cash terms. While UK rates have eased somewhat in the last few weeks, the outlook remains worrying for borrowers.

This group rolling off fixed rates are also likely to be among the most exposed in the Irish market. While fixed rates are now offering some cover for large numbers of borrowers, the vast bulk of those in the market are for 5 years or less. There have been some longer terms on offer but a three to five year fixed rate has been typical for new borrowers in recent years and some have opted for two-year fixed terms There are an estimated 338,000 fixed rate borrowers in the market – the latest Central Bank figures show €10.4 billion in outstanding debt fixed for between one and three years and €34 billion for three years plus. Among the most exposed are those who bought over the past few years at high prices. BPFI data shows that the average value of a new loans has risen over recent years and at €284,000 has now overtaken the highs of the Celtic Tiger days.

It is unclear exactly what kind of market these borrowers will emerge into it over the next few years but there is no doubt that they will face higher borrowing costs. Many with significant outstanding loans could face the choice between a new fixed rate 2 to 2.5 percentage points (or more) above their current rate, or a variable rate which could be higher again. The peak in ECB rates – and how long rates stay there – is hard to forecast given the risk of euro zone recession, but for now financial markets are still pricing in significant additional rises over the next year. To cope with the uncertainty around fixed rates it is interesting to see variable rate deals – often for a period – being used again in mortgage marketing in the UK.

Given that they are in a much earlier stage of their loan, this group looks more exposed over the next few years than those on trackers.

Are there other groups exposed? Dowling identifies one other exposed category: people whose mortgages were sold by the major banks as part of a portfolio of non-performing loans and are currently managed by companies such as Pepper and Mars. These companies have added ECB rate increases on top of existing rates of around 3 per cent, meaning many of these borrowers are facing interest rates of 5 per cent or more. And as they were likely to have been in a group which had difficulty with repayment at some time, some could run into difficult again. A Central Bank report on Thursday showed 25,000 borrowers were still in what was defined as long-term mortgage arrears and higher interest rates will, of course, also put those who can’t pay even deeper into difficulty.

The policy lessons: Fixed rates are protecting borrowers for now, but the lack of wider availability of longer-term fixed rates remains an issue in the Irish market. Some newer lenders have pioneered fixed rates of 20 years or more, but these products have either now gone up sharply in price or are not freely available at the moment. The availability of longer-term fixed rate products could offer an attractive option for many and a more stable market. The Irish market has moved decisively towards fixed rates. Outstanding mortgages with fixed rates for three years or more have increased from €4 billion in 2017 to €34 billion today. But with terms typically less than 5 years this still leave some nervous time ahead for those currently using these products.