This resilience will, in turn, curb arrears in UK residential mortgage-backed securities.
The analysis reveals that only about 1% additional non-conforming borrowers would be unable to cover mortgage payments and meet their living expenses, under a hypothetical scenario of a cumulative interest rate increase of 1.0%. Even if the bank were to raise the base rate by 3.0%, Moody's estimate that only 4% more non-conforming borrowers would face payment problems.
Emily Rombeau, analyst at Moody's, said:
"Borrowers that are up-to-date on their payments will be able to adjust their discretionary spending if incremental rate rises are spread out over the next three years.
"Rates would need to rise to stave-off inflationary pressure, yet arrears in residential mortgage deals are not likely to increase by much, if at all for prime RMBS. Rough economic conditions during the crisis have toughened up non-conforming borrowers, and our outlook on UK RMBS collateral performance remains positive in light of current favourable economic conditions," she observes.
Gregory Davies, Moody's Assistant Vice President, added:
"In UK prime deals, fundamental pool and borrower profiles have characteristics that can counteract rate-rise pressures and support the credit quality.
"For example, prime borrowers are typically stronger in terms of honouring their mortgage loan payments, owing to their higher average salaries and lower loan-to-value ratios, which give them better flexibility to manage upticks in monthly installments."
