European Banks Face an Increase in Residential Mortgage Risks as Interest Rates Rise

DBRS Morningstar released a commentary on residential mortgage risks for European banks. Summary highlights from the commentary include:

• DBRS Morningstar considers that variable rate mortgages are exposed to a higher risk of falling into arrears. Whilst in some countries the share of variable interest rate mortgages remains the largest proportion (e.g. Sweden and Portugal), we note that this proportion has generally decreased in recent years. In addition, borrowers with a rate fixed for a short period e.g. 1-5 years (significant in the UK or Ireland), could also feel the shock relatively quickly.

• Apart from different interest rate type, there are many differences across European mortgages. These include a great variation in relation to the outstanding amount of mortgage debt, with some countries reaching around 90% of GDP (Sweden and Netherlands) whereas others only account for 20% (Italy). In addition, EBA data as of Q1 2022 shows that the stock of mortgages with high LTVs (>80%) is very different across European countries ranging from c. 5% to c.35% depending on the country.

• Other differences include the implementation of borrower based measures as part of their macroprudential toolkit. These measures could prove to be effective in tackling potential credit imbalances with 8 out of the 11 selected countries implementing these measures. Lastly, we see great variation in the level of the mortgages expected loss within European banks that use internal rating based (IRB) models. Notably, the countries with the lowest mortgage expected loss are also those in which a larger proportion of households have a mortgage.

“DBRS Morningstar considers that mortgage risks vary significantly for European banks under the current interest rate rise environment. Differences include a wide spectrum of interest rate types, but there are other key differences that help to identify where risks are under the current context.”said Pablo Manzano, Vice President from the DBRS Morningstar Global Financial Group team. “DBRS Morningstar see that mortgage borrowers linked to variable rates or short-term fixed rates are more vulnerable under the current environment. As a result, we are closely monitoring mortgage performance in those countries” said Maria Rivas, Senior Vice President from the DBRS Morningstar Global Financial Group team.