Up to a third of lower-income Irish mortgage holders could face financial distress trying to meet loan repayments if recent levels of inflation are maintained, according to a new Central Bank note.
The paper, written by Central Bank economist Tamanna Adhikari, defined a homeowner as being “at risk” of financial distress when their residual income is less than 10 per cent of their monthly mortgage payments, after meeting home loan obligations and paying for essential non-housing items, ranging from food and energy to routine medical expenses and phone bills.
The economist estimates that in a severe case of Irish inflation amounting to 9.1 per cent for 2022 as a whole — along the lines of recent monthly figures — some 32 per cent of the mortgaged households in the lowest-quarter income range in the State would fall into the “at risk” category. That is up from 26 per cent before the recent inflation shock.
Under a scenario of the Central Bank’s own baseline forecast that inflation this year will average 7.8 per cent, the author estimates that close to 30 per cent of home borrowers in the lowest-income quartile would fall into the risk category.
By contrast, it sees the “at risk” ratio among the highest-income quarter of households moving from 1.5 per cent before the inflation crisis to 1.7 per cent under the baseline scenario, and 2.1 per cent in under a severe case.
All scenarios assume household income growth of 3.3 per cent this year, but do not consider any impact of interest rate rises on family finances.
The economist sees the overall Irish household “at risk” ratio rising from 9.3 per cent before the inflation spike to 12.7 per cent in the severe case. Her simulations showed disproportionate increases in risk for lower-income, rural and older mortgage holders.
“Ongoing inflationary conditions will reduce real incomes of those households whose wage growth is not in line with the increase in prices,” Ms Adhikari said. “An increase in the share of income spent on essential expenditures decreases the share of income remaining to service debt, posing additional risks to financial stability beyond those that may arise through interest rate increases or wider labour market shocks.”
Executives from the three remaining Irish banks said between late July and early August, as they reported interim results, that they had not yet seen an increase in problem mortgages as a result of the cost-of-living crisis.
However, Bank of Ireland set aside €47 million in the first half of the year to cover potential loan losses at a time of “economic uncertainty, primarily driven by Russia’s invasion of Ukraine, inflationary pressure and interest rate expectations”. AIB signalled that it planned to make provisions to cover similar risks in the second half of the year.
“We are dealing, once again, with a big array of uncertainties of [rising] gas prices, energy prices, inflation and interest rates, dropping global economic [growth and] supply chain challenges,” AIB chief executive Colin Hunt said on July 29th.