Based on the Bank of England’s criteria, “risky” mortgages are those in which the monthly payment is more than 4.5 times the borrower’s annual income. A new study by Mazars found that 19 of the 20 postcodes with the most “risky” mortgages were in London.
Maidenhead, which is still within the London commuter belt, has the only non-London postcode in the top 20.
South West London, in particular, dominated the top spots. With a total of £232 million, Wandsworth had the most high-stakes mortgages, followed by Battersea with £198 million, Wimbledon in third, then Fulham and Tooting.
The Bank of England restricts “risky” loans to no more than 15% of a lender’s mortgage book due to concerns that these loans will lead to defaults.
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Partner at Mazars Paul Rouse explains that this implies financial institutions will have to decide how to allocate 15% of their capital.
According to Rouse, “mortgage lenders have to make a very careful judgement over where they write the riskiest loans in their loan books,” and south London is a logical choice. Only a severe and sustained drop in the housing market will show if that is the case.Hopefully, the bank’s own stress testing is the only thing that can threaten the safety of its lending to its most highly geared customers in a 20-mile radius.
Even in the worst market situations, purchasers should still be interested in areas like Wandsworth, Wimbledon, and Battersea. That’s why banks and other lenders see the housing market there as relatively safe.
These London ZIP codes may be especially vulnerable to a real estate market meltdown if interest rates continue to climb, as borrowers with mortgages costing a large percentage of their income are more likely to default.
Mortgage companies “will be hoping that their loan books are well-prepared to weather some defaults,” Rouse added, referring to the possibility of greater housing market turmoil in the coming months.
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