The U.K's low interest rate environment  is supporting lower-than-expected levels of bank possessions. This bodes well for U.K. RMBS, said analysts at Moody’s Investors Service.

Last Friday, the latest U.K. possession figures showed an unexpected 10% drop on the previous quarter, with 2Q09 possessions at 11,400. These figures were published by the U.K. Council of Mortgage Lenders, representing over 95% of the mortgage market, which attributed the fall partly to the low interest rate environment.

The Bank of England last week published its latest quarterly inflation report, which strongly suggested that U.K. interest rates would remain at their historically low levels for longer than previous market expectations.

“Despite the economic indicators implying a much deeper U.K. recession compared with that in the early 1990s, our view is that the impact on the housing sector may be less severe due mainly to the lower interest rate environment,” Moody's analysts said.

The current bank base rate is 0.5%, whereas at the start of the previous downturn, interest rates were above 10% for over three years.

As a result, mortgage interest payments are at historically low levels, which are helping to suppress the level of arrears, despite the gloomy economic backdrop

However, analysts said that even a small increase in interest rates might have a detrimental impact on the levels of possessions.

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