Economic Letter: Debt giveth and debt taketh away - mortgage debt burdens in Ireland

An Economic Letter (PDF 1.49MB)by Tara McIndoe-Calder considers the reduction of property debt by Irish households between 2008 and 2014 and finds that the rate of deleveraging differs depending on borrowers’ age ranges. Overall, property debt reduced by one fifth over this period, although young borrowers (those born after 1970) reduced their debt levels by 13 per cent, compared to 35 per cent for older borrowers (those born before 1960). Much of this disparity can be attributed to the type of mortgage most prevalent in the age ranges, with repayments for a typical tracker mortgage down 34 per cent since 2008, compared to a fall of just 9 per cent for standard variable rate (SVR) loans.

The key findings are:

• Prior to 2008, young borrowers accumulated debt at a much faster pace than their disposable incomes. Both young and middle borrowers (those born during the 1960s) were also impacted by increases in interest rates during the period, the relaxation of lending standards and increases in loan durations and loan to income ratios.
• More than one in ten mortgaged households in the young and middle cohorts reduced their debt repayments by either moving to interest only arrangements or extending the length of their mortgage as a form of loan forbearance between 2003 and 2008.
• In 2014, the typical loan-to-value (LTV) ratio of younger borrowers was 87 per cent compared to an average of just 20 per cent for older borrowers.
• Young borrowers have the highest concentration of tracker mortgages, close to 40 per cent, reflecting the prevailing lending arrangements of the time. Interest rate pass through is higher for tracker loans than for other rates and as such, those with tracker loans benefited from significantly larger reductions in debt servicing.
• Future interest rate rises will likely result in repayment increases for all variable rate borrowers, but those on tracker rates are particularly vulnerable with relatively high levels of outstanding debt and incomes that are recovering slowly.

The views presented in Economic Letters are those of the author alone and do not necessarily represent the official views of the Central Bank of Ireland.

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