Pepper Advantage, a global credit intelligence company, has released data which points to potential future increases in credit impairments in the Spanish residential mortgage market. 

Using data derived from its credit intelligence platform, Pepper Advantage is able to track payment failures – or Direct Debit Rejections (DDRs) – in real time, building a picture of borrower stress across its portfolios of residential mortgages.

DDRs occur when a customer’s standing order fails to complete, usually indicating that the customer has insufficient funds in their account to meet the mortgage repayment request.  Pepper Advantage considers DDRs to be a reliable leading indicator of borrower stress and potential future default risk, even if the borrower subsequently satisfies the loan repayment requirement another way.

In the six months to December 2022, Pepper Advantage saw a biannual 7.85% increase in DDR rates across its mortgage portfolios, a trend that correlates with increases in Euribor.  Euribor is the rate at which European banks lend to one another and typically correlates to the cost of credit in the Spanish mortgage market for variable interest rate mortgages. Pepper Advantage’s predictive model suggests there was an average monthly DDR increase of 0.6% for every ECB interest rate rise of 50bps in the second half of 2022.

Castilla La Mancha

The national biannual increase in DDRs of 7.85% represents variations across the country, with higher levels of relative stress in areas such as Andalucía, Extremadura, Asturias, Murcia and Castilla La Mancha.  This regional analysis takes into account respective employment and GDP rates to create different predictive ratios for borrower stress as rates rise.

Approximately 75% of all mortgages in Spain are on variable interest rates, referenced to Euribor, which are updated every six or 12 months.  This implies a significant lag between initial indicators of borrower stress – identified by Pepper Advantage – and the potential future realisation of the loan impairment. 

Pepper Advantage has the ability to identify potential problem loans early, which gives it a significant edge in designing and implementing borrower strategies that can avoid dramatic increases in defaults.  As a result, default levels across Pepper Advantage’s mortgage portfolios have remained low by historical levels, despite rising indications of borrower difficulties.

Commenting on the data, Juan Arsuaga, Head of Client Solutions, Pepper Advantage Spain said: “We are seeing Spanish borrowers dip into savings and turn to other forms of unsecured credit to cover the instalments of their variable interest rate mortgages, as last year’s rate rises begin to feed through.  It’s therefore more important than ever that financial investors, lenders and credit managers are able to identify potentially problematic borrowers at an early stage and put in place management measures to help them avoid defaulting on their loans.”