Financial Stability Notes: A Vulnerability Analysis for Mortgaged Irish Households

A Financial Stability Note by Vasilis Tsiropoulos examines the vulnerability of mortgaged Irish households to certain financial shocks. It uses loan level data from the five main mortgage lenders in Ireland and considers both point in time vulnerability and forward looking vulnerability against an adverse economic scenario that would see the following occur over a three year period: property prices fall by 4%, interest rates rise by 1.1 percentage points and unemployment rise by 3.3 percentage points. The scenario is based on that used by the European Banking Authority for its 2016 stress test.

The key findings of the Financial Stability Note are:

• Households with high current loan-to-value (LTV) ratios are among the most vulnerable. Under the adverse scenario, an average of 6% of such loans would be at risk of default each year.
• Mortgages that originated after 2015 (following the introduction of the Central Bank’s mortgage measures) are the least vulnerable in the forward-looking scenario, while mortgages that originated between 2004 and 2009 are the most vulnerable with between 1.1% and 1.3% at risk of default annually.
• Households with multiple loans are slightly more vulnerable than those with single loan facilities.
• Mortgage holders in the Border, Midland and South-East regions were also found to be slightly more vulnerable to this adverse scenario compared to other regions.

Notes

• The views expressed in this Note are those of the author alone and do not represent the official views of the Central Bank of Ireland.
• This is the second publication in the Financial Stability Notes series, launched in April 2018. This new series will cover financial stability related topics including those relating to risks and vulnerabilities facing the Irish and European financial system.