277: The Interest Rate Ladder | How It Affects Mortgage Payments

My father died in November 1993. When we finally opened the pile of post he had left behind, one letter showed the interest rate on the family home mortgage. It was 16%.

In this episode I build what I am calling the Interest Rate Ladder. Every rung of ECB policy since the bank was created in 1999, priced against the same loan so you can see exactly what each rate does to a real monthly payment. The loan: €300,000, 25-year term, tracker at ECB plus 1%.

We start where we are now, at a main refinancing rate of 2.4% and a payment of €1,486 a month. Then we climb down through the cutting cycles, the Troika years, the NAMA fire sales, six straight years at zero, and the negative deposit rate era when savers were paying banks to hold their money. Then we climb back up through 2006, through the point where development appraisals stop working, through Trichet's 4.25% hike two months before Lehman collapsed, to the ECB's all-time high of 4.75%.

Then we go further back than the ECB exists. Irish Central Bank rates in the early 1990s, overnight rates that briefly touched 100% during the currency crisis, and a 12% mortgage that would cost €3,160 a month on the same loan. Then Volcker's 20% at the Fed, and three centuries of Bank of England history including Black Wednesday.

The swing from the ECB's lowest rate to its highest is 1.7x on your monthly payment. At the Bank of England it is 4x. At the Fed it is 4.5x. We have not seen desperate times.

The practical takeaway is at the end. Stress test every deal at 2% above the rate you are being offered. If it does not survive that, do not do the deal.

I have spent roughly 30 years in property across Ireland, Spain and Dubai. I lost a portfolio in 2008 and rebuilt from nothing, which is why rate history is not an academic subject for me.

If you want the frameworks I use to underwrite and stress test deals properly, that is what we work through inside the Elite Property Accelerator: elitepropertyaccelerator.com