Research from credit ratings agency Moody’s showed the combined cushioning effects of low interest rates and unemployment and a strong GDP should hold down arrears levels.
The research follows Governor Mark Carney’s projection on 16 July that Base Rates could begin to rise from 0.5% incrementally over the next three years
The analysis suggests just 1% of prime borrowers would be unable to cover both mortgage and living expenses after an interest rate rise of 1%. If the rate rose to 3%, just 4% would be in the same position.
Annabel Schaafsma, managing director of structured finance at Moody’s, said although mortgage prisoners remain, affordability constraints from high street lenders were never the biggest reason they were forced to stay on current deals.
“It’s more loan-to-values, whether a borrower has an interest-only or self-cert loan and whether a borrower was previously in arrears. Also, the regions have experienced the lowest levels of house price growth in recent years, so this is where you still find the highest numbers of mortgage prisoners,” said Schaafsma.
When rates plummeted, arrears declined in the UK because so many borrowers were on variable rates and in turn, the positive effect this had on borrower spending power, she added.
Although low wages remain, this factor was built into the affordability models behind the research, Moody’s confirmed.
Prime UK borrowers are typically stronger than non-conforming, said Moody’s, in terms of honouring their mortgage loan payments, because they have a higher spending power, save more and have bigger deposits.
‘These characteristics boost the performance of the UK prime mortgage-loan pools as they lower the likelihood of borrowers running into payment difficulties,’ said the agency.
Levels of 90+ day arrears levels for UK Prime Residential Mortgage Backed Securitisations (RMBS) fell to 1.11% in February from 1.50% in November 2014.
On the securitisation markets, Mortgage Solutions reported last week that Paragon and Precise Mortgages completed the first securitisation deals in Europe after the Greek referendum and ‘no’ vote at the start of July.
However, the effect of the crisis in Greece pushed up the cost of funds for Precise by 0.30%.
Schaafsma said the fluid situation in Greece has seen see-sawing markets but the fact securitisation was seen as among their key sources of funding would have helped the deals get done.
“What we are seeing is a fairly healthy deal pipeline in the UK even though it’s hard to know what will eventually happen in Greece and by when,” she added.
