80% of borrowers face payment shock if interest rates increase
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Moody’s has warned that 80% of UK mortgage holders could face a payment shock if interest rates increase in 2010.
In its latest Credit Insights report it compares potential rate shocks in the UK, Netherlands and Spain.
It predicts that 80% of all borrowers would be affected by an interest rate shock, which on average would be a 60% shock in payments.
It expects an interest rate rise in the UK towards the end of 2010 and says the UK is likely to come off worse than other European countries such as the Netherlands and Spain.
The UK traditionally had shorter fixed-term rates than in the Netherlands and a larger scale of borrowers on repayment mortgages, but in recent times this has changed and an increasing proportion have taken out interest-only deals.
Moody’s says for repayment mortgages, the remaining term will have an impact on the size of the shock and the presence of interest-only mortgages will also increase this shock.
Moody’s’ says UK and Spanish borrowers are more susceptible to interest rate shocks than Dutch borrowers, mainly because of the prevalence of floating-rate mortgages.
In its report, Moody’s says: “The size of the shock is expected to be greatest in the UK due to the combination of a significant amount of interest-only mortgages and the high volatility of short-term rates.”
It says an increase in interest rates is likely to lead to delinquencies - especially in the UK, because the UK has more mortgages with adverse characteristics.
It says: “The UK is probably most at risk on a combined basis as there are concerns on both the frequency and the size of an interest rate shock.”
Readers' comments (10)
Anonymous | 15 Mar 2010 3:53 pm
It does not matter if the rates rise in 2010 or in 2011, either way there will be thousands of customers in for rising repayments. The biggest problem will be the sub prime borrowers who will be trapped at teh mercy of their current lender with nowhere to go to. Only then will we see the impact the demise of the specialist lending market will have on the property market. A sub primehouse can be identical to a prime house, the effect will be if the sub prime property is taken into possession it will have a knock on ffect of others in the area. Not bad if it is 1 or 2, but if we have large scale repossessions then the effects will be catastrophic.
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Grey Haired Underwriter | 15 Mar 2010 4:58 pm
With due respect anon but that is tommyrot. A sub-prime borrower does not remain sub-prime indefinitely unless they continue to be silly with money. Once they've conducted their borrowing properly for two or three years most lenders will consider them to be seasoned borrowers and will lend to them in the same way as they would any other prime applicant.
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Anonymous | 15 Mar 2010 5:21 pm
Have you looked at lending criteria recently grey haired? Any adverse is throwing out applications and specialist lenders such as Platform are being stricter than high street lenders. During the economic downturn there are many people who have been classed as 'sub prime' through no fault of their own. The effects will be there for all to see if there are no lenders to accomodate customers with adverse credit. I am not suggesting products of old but there is a need for Light Adverse in the market, correctly underwritten for risk and priced accordingly.
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Anonymous | 15 Mar 2010 5:22 pm
Its high LTV thats the problem. Anyone who bought at 95% in the last 3 years is probably facing negative equity now. They won`t be able to remo and if the payments rise and they realise their house is worth less than they are paying for it, they will just walk away. That is when the repo`s will start and we run the risk of a flood of cheap property into the market.
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Anonymous | 16 Mar 2010 9:45 am
it affects people like me who bought in 2006 with a Northern Rock Together mortgage. Partner now studying full-time as was layed off twice so not been able to make overpayments.
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Anonymous | 16 Mar 2010 10:21 am
what a load of tosh....anonymous 15/03. Do you have experiance of sub prime rates? The majority of deals now are leaving the fixed rates of the 'boom' time and are on extremely good tracker deals with rates varying from 0.5 to 3% above base. You cant beat this with anything on the market at present. If we assume these people are paying sub 4% and were able to manage on 6-8% then if they are still in employment they have plenty of breathing space for rate rises. Also most of these lenders will offer substantial discounts to get them off the books.
Re Grey Haired 15/03...have you actually tried to place a genuinely adverse case back into the prime market? You will notice that any indiscretions in the last 6 years are throwing it out, the prime lenders do not have an appetite for this risk at the moment. You can only use igroup or blemain who have less than attractive rates and so would disadvantage the client.
As for anon 16/03 just how is not being able to make overpayments affecting you? if you are paying your mortgage then sweet, no problems in regards repossession. If you want to move then the product is portable and if you want to remortgage then the unsecured element is just that, unsecured so you dont need to repay it as part of a remortgage. ok the interest rate will rise and this may make any new deal unviable but if your worst problem in life right now is not making overpayments then I say well done to you.
What we need is a sensible lending product that treats people as individuals and looks at their circumstances and then uses a human approach to underwriting. A person who simply missed 1 payment due to losing their job is treat the same way as somebody who has a string of defaults, ccjs and charging orders.
The FSA need to stop interfering in product development and lender capital adequacy rules and let some innovation return to the market place to help those who want to be helped. I am not advocating a return to mass self cert, unlimited adverse and 125% mortgages but come on guys cut the public some slack.
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Anonymous | 16 Mar 2010 10:58 am
Anon 16/03 10.21
I have plenty of experience with sub prime and I am fully aware of the current rates. If linked to BBR or LIBOR then no issue, but what if reverted to SVR? Even if rates are currently low they may be stuck with that lender. As you rightly say the adverse will remain for 6 years and cases are being rejected on a late unsecured payment at the minute, let alone a 4 year old CCJ. I Group credit scoring is a nightmare to pass, and Blemain are choosing almost prime cases because they can. MBS are doing what their criteria says, albeit at 50% max LTV. You are also correct in how people are being classed as 'sub prime'. A late payment here and there does not automatically make somebody a bad risk, the reason why needs to be understood and a sensible decision made. Kensington appear to be trying to do something to kick start the market although distribution is limited. Aldermore could also be a shot in the arm. As for the FSA, how can they try to influence products when they quite clearly do not understand mortgages full stop.
Agreed that the old ways were not correct but a Light Adverse range is essential to any recovery in the mortgage industry.
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Anonymous | 16 Mar 2010 3:49 pm
anon 10.21 - my point (9.45) is that when rates do go i will struggle to pay as per the subject of this article. if i was making overpayments i might have been able to secure a fixed rate which would have provided stability. think before you rant
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Anonymous | 17 Mar 2010 6:35 pm
It is the adverse lenders that have caused the underwriting problems. In the old days most lenders would accept minor adverse on standard / prime rates. Then we had the adverse lenders with loaded rates, the prime lenders (that accepted some adverse) saw the opportunity for increasing margins and added a sub prime range and then refused to accept the smallest of adverse on their prime products – including forcing existing borrowers on their prime rates with minor adverse to remortgage if a further advance was required – even where the mortgage had been paid promptly.
As to borrowers being stuck on SVR, it was inevitable that at some stage the subsidised new business rates would disappear – originally thought it would happen due to loyal existing borrowers on SVR becoming a rarity, and thus the lenders not having the margins to support the subsidised / discounted new business rates. As it is the credit crunch is to blame for this.
We have had rates up at circa 15%, as it is when rates are predicted to rise they will probably be still be in single figures. As to negative equity – last time we saw the birth of the amateur landlord and I expect this sector to grow if the number with negative equity increases substantially.
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Anonymous | 19 Mar 2010 7:29 pm
With all predictions that mortgage rates will rise, 80% is hardly rocket science. The other 20% will be effected when they come out of their current fixed rate deal. The real news here may have been around the impact in terms or affordability. i.e. How many of these individuals can't afford the increase. Seen some press releases by Credit Reference Agency Callcredit on this and the number looks high.
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