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The interest rate exposure of mortgaged Irish households

Author

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  • Byrne, David

    (Central Bank of Ireland)

  • McCann, Fergal

    (Central Bank of Ireland)

  • Gaffney, Edward

    (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.

Suggested Citation

  • Byrne, David & McCann, Fergal & Gaffney, Edward, 2023. "The interest rate exposure of mortgaged Irish households," Financial Stability Notes 2/FS/23, Central Bank of Ireland.
    • Handle: RePEc:cbi:fsnote:2/fs/23
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    References listed on IDEAS

    as
    1. Kelly, Robert & McCann, Fergal, 2016. "Some defaults are deeper than others: Understanding long-term mortgage arrears," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 15-27.
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    Cited by:

    1. Doorley, Karina & Duggan, Luke & Simon, Agathe & Tuda, Dora, 2023. "Distributional impact of tax and welfare policies: Budget 2024," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    2. Lambert, Derek & Mahony, Michael & McGeever, Niall, 2024. "The financial resilience of Irish CRE borrowers," Financial Stability Notes 4/FS/24, Central Bank of Ireland.
    3. Scott, David & Pratap Singh, Anuj, 2024. "Mortgage switching through the turning of the interest rate cycle," Financial Stability Notes 2/FS/24, Central Bank of Ireland.
    4. McQuinn, Kieran & O'Toole, Conor & Kenny, Eoin & Hauser, Lea, 2023. "Quarterly Economic Commentary, Winter 2023," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC2023WIN.
    5. Adhikari, Tamanna & McGeever, Niall, 2023. "How resilient are Irish SMEs to input cost inflation?," Financial Stability Notes 6/FS/23, Central Bank of Ireland.
    6. Shaikh, Sameer & Kilgarriff, Paul & Gaffney, Edward, 2023. "Exploring missed mortgage payments in the first year of monetary tightening," Financial Stability Notes 9/FS/23, Central Bank of Ireland.
    7. Byrne, David & Foster, Sorcha, 2023. "Transmission of monetary policy: Bank interest rate pass-through in Ireland and the euro area," Economic Letters 3/EL/23, Central Bank of Ireland.

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