The interest rate exposure of mortgaged Irish households

David Byrne, Fergal McCann and Edward Gaffney
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David Byrne: Central Bank of Ireland
Fergal McCann: Central Bank of Ireland
Edward Gaffney: Central Bank of Ireland

No 2/FS/23, Financial Stability Notes from Central Bank of Ireland

Abstract: Interest rates in the euro area have increased by 350 basis points from July 2022 to March 2023, having been at, or close to, zero for much of the preceding decade. In this Note we focus on the wide dispersion in exposure to this monetary policy shock across Irish mortgage borrowers.We highlight the importance of recent switching activity and new loans originated on fixed interest rates, which insulate 60 per cent of mortgages in the short term and 41 per cent of mortgages until December 2024 or later. We estimate repayment increases to the end of 2023 under two scenarios: a 350 and a 425 basis point tightening from June 2022 to December 2023. The average repayment increase is 13 and 16 per cent across the two scenarios. There is extremely wide dispersion in the experience of the shock: among the most-exposed fifth of mortgagors the increase is 41 and 50 per cent, respectively, while up to two fifths of borrowers will experience no increase whatsoever. The mostexposed group, dominated by tracker and interest-only loans, and those with longer terms to maturity, had significantly smaller monthly repayments and interest rates at June 2022, and the result of the repayment change would be an equalisation of repayments across cohorts.

Date: 2023-04
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