DBRS Morningstar Releases Commentary on UK Cladding: Much More Than a Safety Hazard

DBRS Morningstar released a commentary titled “UK Cladding: Much More Than a Safety Hazard”.

In June 2017, a horrific tragedy occurred in West London where the cladding on the outside of a high-rise block of apartments, Grenfell Tower, caught fire and resulted in 72 deaths. Cladding and other fire safety issues for flats in high-rise buildings could affect roughly 1.5 million flat owners in the UK, many of which will face significant hurdles when trying to sell these flats or obtain a mortgage on them. Insurance premiums may also increase for flat owners, and some will have to pay for safety patrols until the safety issues are resolved.

DBRS Morningstar’s analysis, based on a sample of 670,000 mortgage loans, found that:
-- Hotspots for flats are London (28.5%), Glasgow (3.7%), and Edinburgh (3.2%). East London has the most flats, accounting for nearly 7.5% of all UK-wide flats.
-- House prices would need to decline by more than 20% of their current value for a meaningful number of mortgage borrowers to end up in negative equity.
-- Fire safety repair bills (even after accounting for differences in labour costs) may not be proportional to the property value. This means that borrowers in the northern UK where property values are cheaper could have repair bills which, relative to their property value, are higher than in London.

“Borrowers are likely to face higher mortgage costs because of an increase in their mortgage loan-to-value ratios, either as result of reduced flat values or additional debt undertaken to fund repairs”, said Ketan Thaker, Head of European RMBS and Covered Bonds. “DBRS Morningstar’s analysis shows that, assuming that borrowers can remortgage, they may still face higher monthly payments in most cases. Furthermore, the impact could be much more severe for borrowers if they cannot get a new mortgage and have to move onto the lender’s standard variable rates, which tend to be higher”, he added.

Please refer to the commentary for further details on cladding issues as well as their impact on borrowers and potential impact on mortgage pools in residential mortgage-backed securities in the UK.

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information on the industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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