New research on Mortgage Repayment Affordability across the Income Distribution

• Resilience of mortgage borrowers has improved on the basis of monthly serviceability relative to income.
• Lower income borrowers no longer have the highest mortgage service burdens relative to net income.
• Relative to 2008, lower income borrowers exhibit the biggest improvement in affordability.

The Central Bank of Ireland has today published a Financial Stability Note written by Jane Kelly and Elena Mazza, which uses Irish micro data to show that since 2008, the resilience of borrowers has improved, in terms of monthly serviceability of mortgage relative to income (MSTI). The purpose of the note is to examine how mortgage service burdens on newly issued mortgages have evolved for different population income cohorts over time.

Average MSTIs on newly issued mortgages are much lower now than pre-crisis, especially among lower income borrowers. In 2008, borrowers from the two lowest population income quintiles were spending on average just over a third of their net monthly income on servicing their mortgage at origination, compared to about a quarter for borrowers in the top income quintile.

By the first half of 2019, borrowers were spending on average between a fifth and a quarter of net income servicing mortgages, with lower income groups spending slightly less on average than higher income groups.

When measuring the mortgage relative to residual income after reasonable living expenses, there is also a reduction relative to 2008. Lower income borrowers exhibit the biggest improvement in resilience to potential shocks, although they still have less remaining disposable income on this measure compared to higher income borrowers.

Notes

Library of Financial Stability Notes