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Moody’s has warned that 80% of UK mortgage holders could face a payment shock if interest rates increase in 2010.

In its latest Credit Insights report it compares potential rate shocks in the UK, Netherlands and Spain.

It predicts that 80% of all borrowers would be affected by an interest rate shock, which on average would be a 60% shock in payments.

It expects an interest rate rise in the UK towards the end of 2010 and says the UK is likely to come off worse than other European countries such as the Netherlands and Spain.

The UK traditionally had shorter fixed-term rates than in the Netherlands and a larger scale of borrowers on repayment mortgages, but in recent times this has changed and an increasing proportion have taken out interest-only deals.

Moody’s says for repayment mortgages, the remaining term will have an impact on the size of the shock and the presence of interest-only mortgages will also increase this shock.

Moody’s’ says UK and Spanish borrowers are more susceptible to interest rate shocks than Dutch borrowers, mainly because of the prevalence of floating-rate mortgages.

In its report, Moody’s says: “The size of the shock is expected to be greatest in the UK due to the combination of a significant amount of interest-only mortgages and the high volatility of short-term rates.”

It says an increase in interest rates is likely to lead to delinquencies  – especially in the UK, because the UK has more mortgages with adverse characteristics.

It says: “The UK is probably most at risk on a combined basis as there are concerns on both the frequency and the size of an interest rate shock.”

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