Early signs of repayment challenges for vulnerable mortgage holders, the Central Bank says

The Central Bank of Ireland

THE IRISH ECONOMY has proven resilient to inflationary pressures, but risks are becoming more visible, the Central Bank of Ireland has said today.

In its latest Financial Stability Review, published today, the Central Bank outlined how headline inflation is falling, but underlying inflation is proving more persistent.

It said the global economy continues to face higher interest rates for longer than previously expected which raises risks across financial markets.

Governor of the Central Bank, Gabriel Makhlouf said today that he expects inflation to return to the 2% target by 2026 which will in turn lead to a reduction in interest rates.

“Since our last review in June, inflation has fallen in many economies but we remain some way from our target.

“The Irish economy has continued to expand since the last review, albeit at a slowing pace. The labour market remains resilient, with strong wage growth. However, we must also acknowledge that a range of previously-flagged risks are now closer to materialising than in June,” he said.

Today’s report stated that the global economy is at risk of further inflationary shocks from geopolitical tensions, signs of fragmentation of the global economy, and extreme weather events.

It noted that the Irish economy has continued to grow but at a slower rate with risks to this rising and becoming more visible.

Among these headwinds are tentative signs of a slowdown in export flows and corporation tax receipts following years of what the Central Bank described as “exceptional growth”.

It said today while households have continued to prove resilient and benefit from “robust” income growth, low levels of debt and prudent borrowing, there are early signs of repayment challenges for some vulnerable borrowers.

The full impact of higher interest rates still lies ahead for consumers.

The Central Bank urged anyone facing repayment challenges to contact their lender at the earliest opportunity.

Likewise, growth in revenues has supported domestic businesses, but pockets of vulnerability are visible in businesses that have struggled since the pandemic.

The report today noted that a moderate increase in the insolvency rate and early arrears on business loans are now emerging.

Domestically, the commercial real estate sector is the one most impacted by higher interest rates with commercial real estate prices in Ireland falling by more than 20 per cent since mid-2020.

Structural changes in offices and retail have also impacted this price fall.

Mortgages

Today’s report outlined how lending patterns for the first half of this year suggest that changes to mortgage lending rules introduced last year continue to achieve the aim of promoting sustainable mortgage lending standards.

The new rules introduced in 2022 increased mortgage borrowing limits for first-time buyers, raising the limit to four times their gross income.

The Central Bank said today that these measures are viewed as a permanent feature of the housing and mortgage market and the Central Bank does not foresee regular changes to their calibration.

In relation to how the higher interest rate landscape is impacting homeowners, the Central Bank said fixed rates have so far shielded many from them.

Approximately half of all mortgage owners are on fixed-term rates, with those on tracker mortgages immediately feeling the impact of higher rates.

The Central Bank’s Director of Finance Stability, Mark Cassidy said today that tracker mortgage holders are in a much more vulnerable position.

He said fixed rate mortgage holders tend to have significant financial buffers. This will contribute to the increase in the rate of arrears being much slower.

He did note however that part of the Central Bank’s assessment today shows that there are quite a number of mortgage holders who don’t have significant savings and if their financial position were to change as a result of a shock to the economy then this would exacerbate the situation.

Banking

Today’s report also noted that the profitability of the Irish banking sector continues to increase as a result of higher interest rates.

It said that at a time when broad, systemic risks have not yet materialised, the Countercyclical Capital Buffer rate for banks will be maintained at 1.5 per cent.

In light of the changing banking landscape, Permanent TSB has been designated a systemically important institution and will be subject to additional capital buffers.

Ulster Bank’s designation as a systemically important institution has been removed as it continues its phased exit from the market.