If interest rates rise - how are you prepared?
Evaluating the likely impact rising interest rates could have on customer and company portfolios is high on the agenda for many organisations at present.
This isn’t only relevant for mortgage lenders, but crosses a wide range of markets, including Retail, Finance, Telecommunications, Financial Service providers and commercial lenders. 45% of people with an auto finance loan have a mortgages, as do 35% of credit card customers and 40% of loan customers. What could happen to these credit commitments if rates rise and their disposable income is put under pressure?
The main issues concerning lenders and regulators include:
- How quickly rates will rise and the impact?
- What if rates rise earlier and/or significantly faster than currently anticipated?
- What is the impact on customer’s affordability and their ability to pay?
- For mortgage lenders would the rate rise be off-set by increased losses in certain segments of the customer base? Additionally, how can mortgage lenders ensure they meet the Mortgage Market Review requirements to appropriately stress test the impact of rate rises?
- Would this impact on the current customer product offers and their suitability?
The combination of market and portfolio insight into current risk concentrations (benchmarked against the rest of market), alongside our expertise in economics provide a range of deliverables to assist you in strategic planning, contingency management and stress testing.
- A view of your portfolios current position within the market - A tailored Market & Portfolio Insight report, comparing your portfolio (stock) to a specific peer group* or the ‘rest of market’ for a series of key lending terms and performance metrics
- Identification of risk concentrations within your portfolio - A view of your levels of £ exposure, arrears and loss rates (for lender portfolio and peer group/rest of market) by geography, demographic segment, customer risk score band, loan to value on mortgages and monthly disposable income
- An understanding of the customers’ affordability position – modelling net monthly income and household expenditure, combined with the customer mortgage/rent payments and existing credit commitments from the bureau.
- An economic report showing the impact of alternative interest rate scenarios on the key economic drivers of affordability and household disposable income. The scenarios will be developed specifically for the demographic and geographic profile (FSS segment and Local authority area) of the portfolio being analysed
- A predictive view of the impact of each of the economic scenarios on each customers household’ disposable income and the impact rising interest rates could have upon your specific portfolio
- Where your future risk concentrations are under each interest rate scenario
- Forecasts of arrears and losses for your portfolio under each scenario
- On-going monitoring of effectiveness of remediation actions and risk concentrations
- A variety of options, from standard to bespoke services
Our tailored solutions aim to give you the insight you need to use within your strategy and planning. Specifically providing you with:
1. Regulation support
a. Supports your case for a reduction in capital requirement
b. Avoidance of penalties
c. Reduced effort required internally to support reporting overheads
2. Operational planning
a. Maintain levels of collections performance as interest rates rise
b. Case prioritisation and specific collections paths
c. Determine level of additional resources required to service portfolio
3. Risk appetite
a. Manage acquisition strategy and lending policy to reduce concentrations of customer base in current and future high risk segments
b. Project arrears and loss rates to refine risk appetite statement for risk committee and regulator
4. Mitigation of future risks
a. Identification of customers at risk in the future
b. Pro-actively reduce exposure or restructure to reduce monthly payments
c. Target customer service calls or financial reviews