IT’S STRANGE WHEN a 0.02% change in anything merits news. 

But this is where the UK market is at right now – homeowners are so parched for good news following a rapid series of interest rate rises that any marginal decline becomes an oasis in a desert.

So when the UK average two-year fixed rate for new mortgage loans briefly dipped from 6.81% to 6.79% earlier this week, it generated headlines like: ‘Hope for homebuyers’.

In some ways, the UK mortgage market is fairly different to the Irish one – it’s of course much bigger, the Bank of England calls the shots rather than the European Central Bank and average rates are significantly higher.

But the two share a common issue, one has come into focus slightly faster in the UK than here – how people switching off low fixed rates are going to fare in this new high-rate desert.

In both cases, the crux of the issue is simple. In countries like the United States, 30 year fixed mortgages are common. In Ireland and the UK, it’s much more common that homeowners only lock in a rate for five years maximum.

This wasn’t much of an issue over the last decade or so – someone coming off a low mortgage rate just refinances for a similar one. Give or take, people’s monthly repayments stayed broadly the same.

Now, what is set to happen is that someone who was paying a 2% rate faces a rate of 4% or 4.5% in Ireland, or even higher in the UK.

The percentage differences don’t sound like much. But they could leave people paying hundreds of euros extra a month.

The interest rate rises are now being referred to as a crisis in the UK, coming hot on the heels of soaring energy bills and a more general surge in inflation.

The Bank of England has recently published figures showing that, of the homeowners who will come off their fixed rates in the coming years, almost one million will be forced to pay an extra £500 a month because of the higher rates.

New research from the Institute for Fiscal Studies (IFS) laid out the scale of this impact – mortgage holders affected will lose an average of 8% of their disposable income. Younger buyers in their 20s and 30s, who haven’t had a chance to pay off much of their loans yet, will be hardest hit, losing up to 11%.

“The last time rates were as high as they are now was before the 2008 recession. But people now are spending more of their income compared to then,” Thomas Wernham, a research Economist at IFS, told The Journal.

“People are now spending between 20% and 30% of their disposable incomes on mortgages.”

While mortgage rates were higher in the past, property also used to be cheaper. Wernham said the net result is that housing is cutting into incomes in a way not seen in recent decades.

“If you go back to say the 90s, rates were higher but prices were much lower. It’s new to see such a high proportion of incomes spent on mortgages,” he said.

“This isn’t a return to normal, it’s something of a new normal.”

So, if the mortgage timebomb has started to go off in the UK, industry figures here are afraid it’s a preview of what will shortly happen in Ireland.

Michael Dowling, from Dowling Financial mortgage brokers, estimates 60,000 Irish homeowners will come off fixed rates by the end of 2023.

“The same affordability issues in the UK are arising here,” he told The Journal.

“Customers could see annual payments rise by €3,000, which is a significant increase. Some will be able to absorb it, but others will struggle.”

He points to mortgage arrears figures from the Central Bank as evidence that many households are already struggling with higher rates.

“Between March 2022 and March 2023, there were 19,400 mortgage accounts in arrears of more than 90 days, a rise of more than 3,600 in just 12 months,” he said.

“That is very much a direct result of the rate hikes, and there have been even more increases since then.”

Despite the higher rates and cuts to their income, many mortgage holders are still in a (relatively) decent position.

While almost 50,000 mortgage holders in Ireland are in some form of arrears, that is out of a total of more than 700,000 mortgage accounts.

In the UK, although the number of homes under significant financial pressure because of mortgage payments is estimated to rise to 2.3% by the end of 2023, it is still some way off its financial crisis peak of 3.4%.

But that they will not be pushed to the brink of financial ruin will likely come as cold comfort to many homeowners. 

With inflation still high and at least two more rate hikes from the European Central Bank expected, Irish mortgage holders coming off fixed rates face a difficult landscape for the foreseeable future.