Fitch Ratings says that the latest information on payment rates across European mortgage markets suggests that borrower prepayments are becoming more common.
In Fitch's RMBS Compare tool 10 of the 11 European markets covered show prepayment rates rising through 2H14. This follows a period of all-time low prepayment rates in many markets, due to low and stable mortgage interest rates, stagnant housing markets and constrained new lending.
The reasons for the rising prepayment rates vary across markets, from the availability of more attractive alternative mortgage products in the UK, Belgium and Italy, to repurchase of mortgages by originators in Spain, and to regulatory measures in the Netherlands.
UK borrowers typically refinance at the end of their fixed-rate periods, which can be up to five years. Increased competition among lenders has brought mortgage rates to a new low of around 2.2% fixed for two years for prime borrowers with sub-75% loan-to-value ratios (LTV). A similar increase in the attractiveness of new loans for residential investment and higher LTV borrowers has driven up average prepayments across the buy-to-let and non-conforming sectors.
In Belgium and Italy, borrowers' mortgage rates are fixed for a longer term. Given the overall decline in mortgage rates in these two jurisdictions, borrowers are repaying their existing loans with newer, cheaper mortgages. In Belgium, this caused a spike in prepayments to 32% on an annualised basis in 1Q15. Meanwhile, data from Italian lenders suggests that many fixed-rate mortgage loans originated prior to 2009 are being repaid as borrowers switch to lower variable rates offered by lenders.
In the Netherlands, the recent uptick in prepayment rates was the result of a combination of factors: the end of a temporary tax exemption for parental gifts of up to EUR100,000, the reduction in the maximum NHG loan amount to EUR245,000 from EUR265,000 and the revision in the lending code of conduct, which reduces the amount that can be borrowed.
In Spain rising prepayment rates were mostly a result of portions of the portfolios being repurchased by originators, either due to non-compliance with representations and warranties or as a result of sale of originator bank branches.
Prepayment rates in Greece have remained stable throughout most of 2014, reflecting a weak economic environment and limited refinancing options. This was further fuelled by margins on existing loans being lower than those on new loans, thus reducing the incentive for existing borrowers to refinance.
