First-time buyers fail stress tests ahead of further ECB rate hikes

Retail banks, which have not yet raised their rates yet, are expected to do so by the end of the year. Picture: Denis Minihane

Some first-time buyers are already failing mortgage stress tests ahead of further European Central Bank (ECB) interest rate hikes, said experts.

These first-time buyers are using non-bank lenders, which have raised their rates since the ECB hikes.

"All banks stress test mortgage applicants to see if they can cope with a future rise in interest rates. Some first-time buyers are now finding that they’re failing this stress test as rates go up," said Daragh Cassidy, head of communications at bonkers.ie.

This is a signal of what is likely to come with retail banks, which have not yet raised their rates but are expected to do so by the end of the year. “I think we’ll see it come to a head when main lenders increase their rates,” said Mr Cassidy.

Mr Cassidy said that the first-time buyers that are failing stress tests are looking for homes in Dublin and other big cities, where there are heightened cost pressures. Market analysts expect ECB interest rates to peak at over 3%, with some predicting a peak of 3.25% by the middle of next year.

“For sure, banks will increase their rates, that’s a given. When and by how much will depend on each bank,” said Joey Sheahan, head of credit at online broker MyMortgages.ie.

Tracker mortgage holders will feel the brunt of the rate hikes. There are approximately 300,000 Irish households on tracker mortgages.

Both Mr Cassidy and Mr Sheahan made their comments after the Central Bank released its most up-to-date figures on retail interest rates. This information was collected prior to the ECB's second interest rate hike this year, bringing its deposit rate to 0.75% from zero and main refinancing rate to 1.25%, the highest level since 2011.

The Central Bank found that the weighted average interest rate on new Irish mortgage agreements was 2.6% in August, up one basis point on the same period last year. The equivalent euro area average rate rose by 13 basis points to 2.2%.

For new variable rate mortgage agreements, the weighted average interest rate increased to 3.8% in August. This represents an increase of 46 basis points annually and 17 basis points monthly.

The shift away from variable to fixed rate mortgages in recent years has resulted in higher volatility in the variable rate category, the Central Bank said. The weighted average interest rate on new fixed rate mortgage agreements, which account for the majority of all new agreements, was 2.5% in August.

As the ECB battles inflation with rate hikes, consumer spending has decreased “considerably” in September compared to previous months as cost pressures bite, figures from Bank of Ireland showed.

Spending in pubs was down by 28%, clothing retail dropped by 12%, and bakeries fell by 19%. Spending in restaurants also dropped by 22% and people ordered less from fast food outlets, which posted a decline of 18%. 

Meanwhile, higher interest rates are likely to lead to lower house prices, as seen in the UK. Sales at major British housebuilder Barratt have slowed as interest rates take off there.