Fitch Ratings said although mortgage rates had stabilised, adverse credit borrowers had seen the highest proportional increase to their monthly payments since interest rates started rising in Q4 2021. This has resulted in a 50 per cent rise in late stage arrears among this borrower type, including a five percentage point increase in the 12 months to November.
In total, arrears among non-conforming mortgages rose higher than 20 per cent in Q3, up from 13 per cent a year ago. The firm said this was likely due to interest-only loans and variable mortgage rates.
Fitch said interest-only mortgages were common among adverse credit borrowers, meaning little of the outstanding loan had been paid off through the years which made repayments unaffordable.
Borrowers coming to the end of their fixed rate term could struggle to meet repayments.
Fitch estimated that the first peak of interest-only mortgage maturities would happen over 2027 to 2028, while a bigger wave would be seen in 2031 to 2033.
RMBS transactions hit
The firm said the impact of higher payments on non-conforming or adverse credit loans could negatively impact transaction performance in the residential mortgage-backed securitisation market as ‘better’ performing borrowers were able to refinance and leave these pools.
Prepayment levels, when a mortgage is paid off early, have been high at up to 14.9 per cent since Q4 2021, Fitch said. The firm expects this to return to sub-10 per cent levels.
Further, the combination of borrowers receiving forbearance from lenders amid rising arrears “is compressing the available revenue funds” for these loans.
It also said the recoveries from sold repossessions may be reduced due to higher servicing and legal costs incurred while the recovery process was managed alongside additional, unpaid interest.
Non-professional landlord exit
Fitch said while there had been little performance deterioration regarding arrears in the prime mortgage sector over the last 12 months, the buy-to-let sector had not fared as well.
In the prime sector, arrears of three months or more rose from 0.6 per cent to around one per cent, while buy-to-let arrears tripled from 0.6 per cent to 1.8 per cent.
Fitch said that “many non-professional landlords facing higher mortgage rates have exited the market”, particularly those with more leverage. It added that the drop in supply had led to higher rental prices, and this could impact first-time buyers’ ability to get onto the property ladder.
Drop in new lending offset by lower rates
Fitch said the decline in interest rates since Q3 had been “positive” for the property market. It noted that mortgage approvals had recovered slightly in October and said buyer demand would support market liquidity and transaction volumes if interest rates stayed stable next year.
The report added: “However, for house price growth, borrower affordability would need to improve through either lower interest rates or increased earnings.”
