If interest rates hit 17% here what would happen? Very bad things

While Russia slept, its policy makers put together a most unpleasant surprise for the nation's borrowers.

With the stroke of a pen Russia’s central bank raised its benchmark interest rate to 17 per cent from 10.5 per cent, effective immediately.

Such a move seems unthinkable in an Irish and EU context.

But were it to happen here, just how bad would it get for mortgage holders?

The short answer is really, really bad.

For nearly five years, anyone in possession of a precious tracker mortgage has been able to sit back and watch those on Standard Variable Rates (SVR) bear the brunt of our broken banks’ desperate attempts to stem their losses - losses that arose in no small part out of their reckless issuing of trackers at the height of the boom.

Tracker mortgage holders have benefited hugely from the European Central Bank's attempts to breathe life into flagging economies in central Europe.

But as anyone with the most passing knowledge of economics knows, rates can rise as well as fall. And Russians coming to terms with what their Central Bank has done will know, they can rise very quickly.

Just over five years ago the ECB rate was close to five per cent. Today it is 0.05 per cent and someone on tracker has seen their mortgage rate fall by at least four per cent.

What would happen then if it went the other way? For every €100,000 owed on a 30-year tracker of 1.5 per cent plus the ECB rate, an increase of a quarter of a point adds €13 to monthly repayments. A person with a €300,000 tracker mortgage then would see their repayments rise by around €40 a month.

That does not sound like a huge amount. But that only covers a rate increase of a quarter of one per cent. If rates went up a point, the person with the €300,000 tracker would have to find an extra €160 a month just to keep a roof over their heads.

Russian homeowners will have to contend with a 6.5 per cent increase. If the average Irish homeowner were put in a similar position they would need at least €1,040 more every month to cover the repayment costs of a €300,000 mortgage.

And that is a net figure. To cover a payment spike of that magnitude, a person would need to use €2,000 more of their monthly gross income than is currently the case.

But that is only the start. While an interest rate hike of 6.5 per cent is bad, it is left in the ha’penny place by rates hitting 17 per cent.

If a person with a €300,000 mortgage saw their interest rate climb by 17 per cent, the impact on their take home pay would be ruinous. In fact, an ECB rate jump from 0.05 per cent to the new Russian figure would add more than €2,700 onto the monthly repayments.

The flip side, of course, is deposits. While people with money on deposit would benefit, at least half of all the increase would be wiped out by Deposit Interest Retention Tax (DIRT).

And were more than a million people with mortgages confronted by a payments more than trebling, then any benefits those with money on deposit would feel would be quickly offset by the ensuing civil unrest.

Of course such a development is most unlikely. Fingers crossed it stays that way.