Impact of Rising Rates on UK MortgagesRMBS
The rapid rise of interest rates in the United Kingdom will translate into higher mortgage payments once these loans revise their rates. The increase of mortgage costs paired with the cost-of-living crisis can leave many borrowers facing affordability constrains and not able to service their mortgages. DBRS Morningstar analysed the loan-level information of almost 400,000 loans within 36 portfolios of securitised mortgages in order to assess how the rise of interest rates affects affordability ratios, which borrowers are the most vulnerable, and how many mortgages are expected to revise their rates in the short term.
Summary highlights include:
— Households within the lowest income segments are less likely to hold a mortgage, but those that do are currently paying higher rates and at a comparably worse affordability position that wealthier borrowers.
— Buy-to-let (BTL) mortgages are less likely to see their interest rates revised within the next two years; nevertheless, the prevalence of interest-only loans among BTL loans means that a rise in interest rates could easily double the servicing costs of BTL borrowers.
— While the current debt-to-income ratios are relatively low for most borrowers, the rise of interest rates will erode the financial position of many mortgage borrowers.
“Asset performance will likely deteriorate based on the gloomy economic outlook, and borrowers’ ability to refinance will depend on how high the interest rates rise. A sharp increase in rates could leave many borrowers unable to refinance given their resulting high debt-to-income ratios”, said Alejandro Tendero, Assistance Vice President of European RMBS and Covered Bonds at DBRS Morningstar.