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Falling mortgage rates will not stop borrower payment shock – Fitch

  • 30/03/2023
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Falling mortgage rates will not stop borrower payment shock – Fitch
Homeowners coming off fixed mortgage rates will still experience a payment shock despite a reduction in pricing.

According to Fitch’s Mortgage Market Index for March, the credit rating agency expects mortgage interest rates to stay “broadly stable” for the rest of the year.  

It said borrowers would still benefit from lower rates, which now puts a five-year fixed mortgage at 75 per cent loan to value (LTV) down from a 5.6 per cent peak in October to 4.4 per cent now. 

A 25-year term for a £100,000 mortgage represents a £70 monthly saving compared to October but for people refinancing off rates of around two per cent, payments will increase.  

Fitch said the same representative mortgage could result in a 30 per cent jump in monthly payments from £424 to £550. 

The firm said rates were still historically high and the reductions so far had been “modest”, leaving rates three per cent higher than they were last year. 


High LTV borrowers less impacted 

Mortgages at higher LTV tiers have seen smaller increases due to lenders reducing margins.  

The average rate for a five-year fix at 95 per cent LTV is now around 5.4 per cent, having peaked at 6.2 per cent. Higher LTV mortgages used to be around 1.5 per cent higher than the equivalent at 75 per cent LTV, but this has now narrowed to a one per cent gap, Fitch said. 

It also noted that borrowers who were on a 95 per cent LTV mortgage three or more years ago would be benefitting from a rise in house prices and therefore able to refinance at 75 per cent LTV, which would further guard them from a payment shock. 


Potential for more arrears 

The firm predicted that around £220bn of residential mortgage debt would mature this year, a 40 per cent increase on last year.  

It said many of these loans would be coming from 2021 when the market was fuelled by the stamp duty holiday. 

Fitch said this could cause “performance deterioration” which could result in a rise in owner-occupied mortgage arrears. It said arrears of three months of more could increase from 0.8 per cent to one to 1.25 per cent. 

It added: “We expect a deterioration in mortgage performance as high interest rates and inflation put household finances under pressure. While most households have the ability to absorb projected cost increases those at the lower end of the income scale, those with higher loan-to-income borrowing and those with variable rate debt are most vulnerable.  

“We expect a modest rise in foreclosures as lenders will be accommodating with forbearance provided borrowers can meet interest payments. Forbearance arrangements are likely to increase alongside arrears.” 

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