London continues to dominate the property market, with a recent analysis revealing that 19 out of the 20 postcodes with the riskiest mortgages in the UK are located in the capital. The analysis conducted by Mazars highlights the concentration of highly leveraged loans in London, particularly in South West London where five postcodes top the list.

This raises concerns about the potential risks associated with these mortgages, especially in the event of a property market crash or rising interest rates. In this article, we will delve into the analysis and explore the implications for potential property investors.

London’s dominance in risky mortgages

According to Mazars, the Bank of England defines risky mortgages as loans where the mortgage is at least 4.5 times the borrower’s earnings. Out of the top 20 postcodes with the most risky mortgages, 19 are located in London. The only exception is Maidenhead, which is still within the London commuter belt.
South West London emerges as the region with the highest concentration of risky mortgages. Wandsworth tops the list, followed by Battersea, Wimbledon, Fulham, and Tooting. The total value of these risky mortgages in South West London amounts to £232 million in Wandsworth and £198 million in Battersea.

Allocation of risky loans:
The Bank of England sets a limit of 15% on the proportion of risky loans within a lender’s mortgage book. With this restriction in place, banks and building societies must carefully consider where to allocate these risky loans. Mazars partner, Paul Rouse, suggests that lenders view South London as a viable option. This may be because areas like Wandsworth, Wimbledon, and Battersea are regarded as attractive to homebuyers, even in a downturn. Lenders see these postcodes as a good risk to take, assuming that the market will remain resilient. However, only a significant and prolonged housing market decline will determine whether this strategy proves successful.

Potential risks and challenges:
The concentration of highly leveraged mortgages in these London postcodes raises concerns, particularly as interest rates rise. Mortgages that are worth a high proportion of borrowers’ earnings are considered the most vulnerable to default. Consequently, if a property market crash occurs, these London postcodes could be adversely affected. In such a scenario, these areas may experience a higher rate of defaults and face challenges in property values and liquidity.

Conclusion:
London’s dominance in the property market is evident once again, with 19 out of the top 20 postcodes with the riskiest mortgages located in the capital. South West London seems to be attracting a significant percentage of these risky loans, making it a potential concern for investors in the event of a property market crash or rising interest rates. However, lenders seem to view these areas as relatively attractive, even in adverse market conditions, which may explain their willingness to allocate such risky loans there.

As the housing market faces potential challenges in the coming months, lenders will be hoping that their loan portfolios are well-prepared to weather any defaults. As a potential property investor, it is crucial to carefully consider these risks and market conditions before making any investment decisions in London’s property market.