Lenders Lloyds Banking Group PLC (LSE:LLOY), Barclays PLC (LSE:BARC) and NatWest Group PLC (LSE:NWG) are facing higher risks from up to 43% rises in monthly payments for mortgage customers as rates rise.
But even though the rstep up in costs is significant, analysts at RBC Capital Markets see it as a “slow burn” and do not think mortgage affordability will be a significant driver of risk costs for UK banks over the next 12 months.
Fixed-rate mortgages have increased substantially over the last month and are now above their previous peak, with rate expectations also rising to a peak Bank of England rate of close to 5.75% by the end of 2023 and for rates to remain above 5% until late 2025.
For the major FTSE 350 banks and building societies, average owner-occupier residential mortgage rates now exceed 6.6% for two-year fixes and 6% for five, up 0.8 and 0.5 percentage points since previously peaking last October.
And so far, only around 40% of residential mortgage customers have refinanced onto higher rates, which RBC calculates will only increase to circa 55% by the end of 2023.
The average payment increases using the latest pricing is up 43% or £338 per calendar month for first time remortgagers, 36% or £540pcm for residential owners who have refinanced before, or 243% or £530pcm for landlords.
Higher mortgage payments represent 36-39% of post-tax disposable income for those who have remortgaged before, up from 26-29%, and 25-30% for first timers, up from 19%.
For banks, however, RBC noted that mortgages have historically only accounted for just 3.5% of bank write-offs despite representing almost two-thirds of bank loan books.
“Even during times of stress (like the 2008 financial crisis), mortgage write-offs remained relatively low, increasing to only c.5% on average in 2008-2012.”
Furthermore, most UK banks' coverage has reduced their unsecured lending portfolios since the end of 2019, the analysts noted.
“Lower levels of non-essential spending and high mortgage demand fuelled by temporary measures to stimulate the UK housing market led banks to grow their UK mortgage books by circa 11% on average while their unsecured loan books (including auto loans) have decreased by circa 4%.”
Exposure to unsecured lending, which has historically accounted for about 60% of loan write-offs even though it has only represented around 10% of lending, has also come down from around 11% before the pandemic to nearer 9% as of the first quarter.
“Other factors supportive of relatively low mortgage impairments include: (i) lower average LTVs; (ii) higher loan coverage levels and post-model adjustments; (iii) increased bank forbearance measures; (iv) higher early mortgage repayments; and (v) higher savings income,” the analysts wrote.
For Lloyds, average mortgage rates for two-year fixed mortgages are 6.47% and 5.91% for five-year fixes.
At Barclays, a two-yeat fix costs 6.61% for a 60% LTV, rising to 6.63% for higher LTV, while a five-year home loan costs 5.85% for a lower LTV, rising to 6.15%.
NatWest charges 6.52% for a two year and 5.96% for a five year, according to RBC's figures.