Generation debt: how younger borrowers are most at risk from interest rate rises

Mortgage debt generations

New analysis published by the Central Bank of Ireland highlights how younger borrowers are most at risk from any future rise in ECB interest rates.

In an Economic Letter titled “Debt giveth and debt taketh away: mortgage debt burdens in Ireland”, Central Bank economist Tara McIndoe-Calder analysed the mortgage debt of Irish borrowers across different age cohorts.

McIndoe-Calder compared the mortgage debt of young borrowers (born post-1970) with those of middle borrowers (born between 1960 and 1970) and older borrowers (born pre-1960) during the period 2008 to 2014.

The research observed that younger borrowers were only able to reduce their property debt burden by 13% during the seven-year period, compared to a reduction of 35% achieved by older borrowers.

“The difference arises because younger borrowers have larger mortgages – and long remaining loan durations, and therefore a greater share of repayments is an interest payment,” wrote McIndoe-Calder.

Negative equity was also more prevalent amongst the young with 39% of younger borrowers in negative equity compared to just 7% of older borrowers.

Additionally, younger borrowers were more far more indebted relative to the value of their property than older borrowers.

The typical loan-to-value (LTV) ratio of younger borrowers was 87.1% compared to a median LTV of just 20.6% for older borrowers.

“Particularly vulnerable”

Despite carrying a heavier overall debt burden, younger borrowers got more benefit from the fall in ECB interest rates than older borrowers.

This is because they were more likely to have a tracker mortgage which got cheaper during the financial crisis as ECB interest rates fell.

In fact mortgage repayments for the typical tracker borrower fell by 34% since 2008 compared to a 9% reduction for borrowers on standard variable rate mortgages.

The report notes that while future interest rate increases will likely result in repayment increases for all variable rate borrowers, “those on tracker rates are particularly vulnerable” as they have relatively high outstanding debt levels and their incomes are recovering only slowly.

The research also notes that middle-aged borrowers – those born in the 1960s – were most likely to have taken on additional mortgage debt to trade-up and/or release equity as well as invest in buy-to-let properties.

Older borrowers meanwhile “appear to have stayed largely away from the frothy property market” prior to 2008.