Wednesday 28 September 2016

Legislating for mortgage interest rate caps wouldn't affect ratings - Fitch

Published 20/07/2015 | 12:06

Fitch Ratings Ltd
Fitch Ratings Ltd

The potential introduction of legislation giving the courts the power to cap standard variable rates (SVR) wouldn’t affect the ratings of residential mortgage-backed securities, ratings agency Fitch has said.

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Banks have come under political pressure to cut their rates in an attempt to bring them in line with other European countries.

Fitch pointed out that a legislative cap has also been mooted, although it is not clear whether this would be introduced, or if it is, what level it would be set at.

Fitch said that a reduction in borrowing costs would improve the affordability of mortgages and reduce the stress on borrowers.

But it warned that a side effect of the rate reductions would be an artificial increase in reported arrears, as the calculation is based on the overdue amount divided by the payment due in the period

“As the payment due would become lower following a rate decrease, the reporting could suggest that borrowers have been in arrears for a longer period,” Fitch said.

“However, the majority of delinquent loans are already in late-stage arrears; therefore the effect on this artificial increase would be limited on Fitch's analysis of transactions.”

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