Many borrowers set to face payment shock, says Moody's
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Moody’s has warned that 80% of UK mortgage holders could face a pay-ment shock if interest rates rise in 2010.
In its Credit Insights report published last week, the ratings agency compares the potential for rate shocks in the UK, the Netherlands and Spain and predicts that 80% of all borrowers could be affected by an interest rate rise. This would equate to a 60% rise in payments on average.
Moody’s expects to see an interest rate rise in this country towards the end of 2010 and says the UK is likely to be hit worse than countries such as the Netherlands and Spain.
The UK has traditionally had shorter fixed-term rates than the Netherlands and more borrowers on repayment mortgages. But this has changed recently, with an increasing proportion of borrowers taking out interest-only deals.
Moody’s says that for repayment mortgages the remaining term will have an impact on the extent of the shock and the presence of interest-only mortgages will also increase it.
It adds that UK and Spanish borrowers are likely to be more susceptible to interest rate shocks than Dutch borrowers, mainly because of the prevalence of floatingrate mortgages.
The report states: “The size of the shock is expected to be greatest in the UK due to a combination of a significant number of interest-only mortgages and the high volatility of short-term rates.”
It says that an increase in interest rates is likely to lead to delinquencies, especially in the UK because it has more mortgages with adverse characteristics.
It adds: “The UK is probably most at risk on a combined basis as there are concerns on both the frequency and the size of a rate shock.”
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