Borrowers in East Midlands and SouthWest will fare worst from Bank of England rate hike

Although moderate rises in interest rates, such as the one recently announced by the Bank of England, won't significantly affect the credit quality of UK mortgages, the number of borrowers with stretched finances will rise, according to new research.

Mortgage affordability analysis conducted by ratings agency Moody's suggests those in East Anglia, East Midlands and the South West, and Northern Ireland will be most negatively affected.

The ratings agency said if the 0.25% interest rate rise announced on 2 November is passed on to mortgage borrowers, this would result in an additional 0.12% of borrowers with negative cash flow.

"A cumulative increase in the base rate to 1.25% would lead to an additional 0.55% of borrowers with negative cash flow, and a rate rise to 2.25% would mean an additional 1.26%," Moody's noted.

For these higher rate increases, borrowers who purchased properties in Northern Ireland, East Midlands, East Anglia, and the South West are at a greater risk compared with those who financed properties in Scotland or the South East.

"In the event of a rate increase to 1.25%, borrowers in East Midlands, East Anglia and Northern Ireland are up to twice more likely to face financial stress and go into arrears than a borrower in Scotland," said Moody's analyst Steven Becker.

Moody's noted though that its analysis shows that borrowers across all regions have sufficient cushion against the recent rise to 0.50%. "This rate-hike would only result in a maximum increase of 0.18% of East Anglia borrowers and 0.16% of London borrowers facing negative cash flow after servicing their mortgages and paying their basic expenses. The lowest impact is in Scotland, with 0.07%, followed by the South East, with 0.10%."

But while the study shows that a moderate increase in rates would not greatly affect UK mortgage affordability, Moody's said household debt is high and still growing, and earnings growth and savings rates are lagging inflation, leaving mortgage borrowers vulnerable to an economic downturn.

Currently, 3.1% of the underlying borrowers in the rated residential mortgage-backed securities (RMBS) portfolio, are in negative cash flow, according to Carole Sanz-Paris, senior analyst at Moody's.

"This means that for those borrowers, monthly mortgage payments, our assumption of basic household expenditures and council taxes exceed their monthly household disposable incomes."