Analysis carried out by the ratings agency revealed that in a hypothetical situation of a dramatic fall in house prices, 9% of UK mortgage borrowers would find themselves in negative equity,
Some 22% of mortgage holders in the North of England would enter negative equity in such a scenario, Moody’s said, as these borrowers have built up the least equity in their homes since the financial crisis. In contrast, less than 1% of southern borrowers would see a negative value position with their homes if house prices were to plummet by 20%.
Furthermore, a 10% decline in prices would put up to 9% of northern borrowers and just 0.03% of southern borrowers in negative equity.
In terms of product type, pre-crisis, interest-only mortgages would be the most exposed to such price movements. Interest-only loans account for just over 1/3 of outstanding owner-occupied UK mortgages.
Steven Becker, an analyst at Moody’s, explained: “Post-crisis price gains have not been even across the country, placing borrowers in northern England, Wales and Scotland at greater risk of negative equity if house prices were to decline.
“Interest-only loans, which were most prevalent in the run-up to the financial crisis, are more likely to fall into negative equity because their principal balance stays constant while prices move. When a borrower owes more than a property is worth, the likelihood of default increases,” he added.
On average, property values have doubled for borrowers who took out home loans at the housing market’s lowest point prior to 2003, with those obtaining a mortgage in 2003-06 and 2009-13 witnessing values rise by 30% on average. By contrast, pre-crisis mortgage borrowers have seen the value of their properties increase at a much more gradual rate of 15%.
Moody’s noted that only a few UK borrowers with UK residential mortgage-backed security pools rated by the agency have negative equity after years of house price gains.
However, it added: “That said, borrowers in northern England, Wales and Scotland (which combined make up 34% of UK RMBS collateral) have not recovered as strongly. These regions are particularly sensitive to house price declines.
“Meanwhile, borrowers in southern England, which represent 49% of RMBS collateral, saw their homes significantly appreciate in value following the financial crisis and are less likely to have negative equity if house prices decline.”