MortgagesMay 30 2013

Moody’s warns of default risk with self-employed

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Self-employed mortgage borrowers are more at risk of potential interest rate increases due to the higher concentrations of interest-only loans among this group, Moody’s Investors Service said.

Moody’s said the levels of interest-only loans are greater for self-employed borrowers with 62.4 per cent of loans being non-repayment, compared with 45.5 per cent for employed borrowers.

This greater level of interest-only loans among self-employed borrowers may lead to a more back-end losses in an adverse scenario, in which there are significant interest rate increases.

Last month, the Financial Conduct Authority issued guidance, setting out what it expects providers to do about interest-only mortgages and to ascertain what repayment strategies clients must have in place.

Its thematic review into the state of the interest-only mortgage market also found 90 per cent of customers had a repayment strategy in place.

Moody’s said self-employed borrowers have a 1.7 times greater likelihood of being at least three months in arrears versus an employed borrower at any given loan-to-value.

The FCA said it was important for lenders to have robust strategies in place to offset possible liabilities should homeowners not be able to meet the repayments on interest-only mortgages.

Self-employed borrowers represent about a quarter of overall UK mortgage borrowers.

Self-employed borrowers benefit from lesser loan-to-value ratios and the majority of them live in the south of England.

In Moody’s view, self-employed borrowers will remain more at risk of default than employed borrowers with the UK economy currently flat-lining and significant growth not expected until 2014.

Self-employed borrowers are also more at risk of suffering a drop in income than an employed borrower as they do not benefit from a regular salary to cushion them from the weak economy.

The UK economy has experienced very little growth over the last 18 months with GDP of 0.4 per cent more in the first three months of 2013 compared with the third quarter of 2011.

Moody’s forecast some downside risk should a triple dip recession materialise.

Such a downturn would lead to further austerity measures, which would cause problems for some borrowers who have until now been able to stay current with their mortgage payments, Moody’s warned.