And Fitch says Spain, Australia and the UK are in a financial shock as interest rates rise

by James Klein

SYDNEY – Fitch estimates that Australia, Spain and the United Kingdom have all suffered financial shocks as central banks raised interest rates in response to the highest inflation rate in decades.

The impact in Australia and Spain comes from higher rates on convertible mortgages, while UK borrowers already have relatively high debt-to-income ratios.

The credit rating agency said in a statement that the equity share of variable-rate mortgages and current debt-to-income ratios for borrowers suggest mortgage-backed securities and closed-end stock markets are vulnerable to higher interest rates.

Fitch pressure tested the average debt-to-income ratio for loans formed in 2020, and by the end of 2023, interest rates on variable-rate loans were three percentage points higher than their original ratio, while yields remained unchanged.

“Given both dynamic and fixed-rate loans, borrowers in Australia, Spain and the UK would see the tariff shocks that are most significant in our situation, as measured by the relative increase in pressure against large debt yields,” Fitch said.

Convertible rate loans in Australia, Spain and the UK account for a large share of new sources of credit, with the primary debt-to-income ratio at 26% in Australia and 34% in the UK. Fitch said rates will range between 34% and 39%.

In March, Fitch predicted that interest rates would rise to seven at the US Federal Reserve in 2022 and to four at the Bank of England in 2022. Interest rates would be 3.0% in the US and 1.75% in the UK by the end of 2023. There have been trends similar. Interest rates in Australia and Canada are expected to rise to 1.25% and 2.0% by the end of 2023, respectively.

However, higher-than-expected inflation and worse-than-expected comments from central bank officials since March indicate strong reversal risks to these interest rate expectations, and Fitch said financial markets are tightening faster.

Write to James Clin at [email protected]

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