The squeezed middle. Generation X. The forty-somethings. The people who pay for everything. Call them what you want, but there is one group in the firing line as interest rates rise. These are the people who borrowed big in the run-up to the financial crash, buying their first home with a mortgage many multiples of their income, betting on a property price surge which would soon run out of steam and then forced to surf the wave of negative equity. Now that their homes have finally reached the price they paid for them – or maybe they sold them in the meantime and took the hit – they are being hit by the sharpest rise in interest rates in recent history.
The Central Bank has done the sums and we can pick out the “average” members of the most exposed mortgage holders, may of whom fall into this group. They took out a big tracker mortgage in 2006, the period when credit conditions were at their loosest. As the average first-time buyer – likely a couple – was then 29 years old, they are now in their mid-40s. They were born about 1977 when the most popular baby names were still John and Mary. Our “average” buyer in the most exposed group of mortgage holders - the worst-hit 20 per cent of all borrowers - took out a big loan, so the outstanding balance is still a hefty €225,000 and they still have 19 years remaining on their loan. Their repayments have risen, so far, by about €400, not far off €5,000 a year extra in the middle of a cost-of-living crisis. This most exposed group accounts for about 125,000 home mortgage loans – a sizeable group.
[ Mortgage relief on agenda for budget after ECB rates rise againOpens in new window ]
One group who got into trouble on their mortgages – not difficult when the Tiger bubble burst and many jobs were lost and incomes cut - are particularly in the spotlight. Their loans were sold to investment funds – the infamous vultures – and they are now managed by specialist mortgage service firms. More than 100,000 of these loans were sold by Irish banks, notably Permanent TSB, as they tried to clean up their loan books under pressure from regulators.
Those whose loans were sold were repeatedly assured by Government Ministers and the Central Bank that they would get the same consumer protections – and rules were changed in this area. But nobody foresaw the sharp rise in interest rates. As many of these borrowers were already on higher variable rates, once ECB increases were passed on by the mortgage managers, their interest rates quickly reached high levels. Some are now paying at rates of 8 per cent or more and find it difficult, or impossible, to move lenders due to their poor credit history. The Central Bank has previously estimated that some 40,000 of these borrowers were on variable rates – and 18,000 were already paying at 5 per cent plus at the start of this year. This group is right to be annoyed: it was sacrificed on the altar of improving bank balance sheets.
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And now the Government faces a wider political problem. Pressure is growing to “do something”. And this is important, politically, too. The Government, and particularly Fine Gael, see the aspirant middle-class as “their people”. With younger voters – who are unable to buy houses and hammered by high rents – drifting to Sinn Féin, the Government needs to hang on to Generation X, already housed and employed. Now they, too, are facing a financial squeeze. It is no coincidence that Sinn Féin finance spokesperson Pearse Doherty has been hammering away in the Dáil calling for a targeted return of mortgage interest tax relief.
ECB president Christine Lagarde more or less told mortgage holders across the euro zone to ‘suck it up’ in her press conference this week. The Government, seeking re-election, may not be quite so blunt
This one is tricky for Minister for Finance Michael McGrath, who was critical of the burden being put on households when the relief was phased out in 2015. Now, as Paschal Donohoe’s partner in prudence, he may take a different view.
And so the Government is scrambling. Mortgage interest relief is expensive and the Sinn Féin policy of restricting it to apply to increased repayments also has a political danger. It is that in many cases those on trackers have done well for years and are now facing similar repayment burdens as other borrowers, who can legitimately ask why they shouldn’t get help, too. Giving relief to everyone would be expensive, and the better off with bigger loans would gain most. As well as helping those in trouble, it will also help many who are doing fine and whose incomes have risen in an improving economy. Remember that the figures above refer to the most exposed section of the population - the hit for many other tracker holders, while often substantial, is not as high. Such a relief, once introduced, would be politically impossible to phase out quickly, with interest rates due to stay at higher levels for some time.
The squeezed middle will surely get some help in the budget, though how this will be structured is unclear. Those worst hit by mortgage rises will definitely be targeted, but whether through specific mortgage measures or general income tax relief and increased spending in areas like childcare is still up for grabs.
[ Interest rate rises: Are you one of the borrowers being hammered?Opens in new window ]
It is all part of the general pressure on Government to compensate everyone for everything, short of higher air fares for their holidays. The Opposition charge is always some version of the Government “sitting back” and letting people suffer financially, but the reality is that there is only so much the State can, and should, do. Sensing the public grumpiness, Ministers are giving out to energy companies, criticising profiteering businesses and calling on banks not to go too hard on mortgage holders and to help them switch. But much of this hot air. And with the exchequer flush with cash, the usual excuse of having no money is not available. As pressure grows for more and more spending, there is a danger of our corporate tax windfall being frittered away.
ECB president Christine Lagarde more or less told mortgage holders across the euro zone to “suck it up” in her press conference this week. The Government, seeking re-election, may not be quite so blunt. John and Mary feel they are being squeezed from every angle and their mortgage bill is now a big political issue. Something will be done: just watch this one run. And Johann and Maria elsewhere in the euro zone will be feeling the same, wondering why they are paying such a high price for the fight against inflation, meaning Lagarde and her council can expect to start getting some serious political kickback.
* This article was edited to clarify that the figures relate to the worst-affected tracker mortgage holders rather than the entire group of tracker holders.