Prepayment rates on UK mortgages may begin to rise if house prices continue to recover and interest rates begin to normalize, according to a report Tuesday by Standard & Poor’s Ratings Services. “Prepayment rates in the UK mortgage market have fallen significantly over the past 18 months, constrained by a combination of borrowers’ lack of ability and willingness to switch mortgage products,” said credit analyst Andrew South. If house prices continue their modest rate of recovery from lows seen in early 2009, prepayment rates in UK residential mortgage-backed securities (RMBS) could improve in coming months, he added. “However, if house prices undergo a ‘double dip,’ ultimately leading to a 35% peak-to-trough correction some time in 2010, prepayment rates would remain depressed for the foreseeable future, as disproportionate numbers of borrowers struggle with low or negative equity,” South said. The S&P report arrived as Nationwide Building Society said house prices in the UK moved up 0.5% again in November, bringing average prices up 2.7% from a year earlier. The average price is now at £162,764 (US$270,884), similar to early ’06 levels. “Despite continued uncertainties about the future, the better than expected performance of the labor market has probably contributed to the surprise rebound in house prices this year,” said Nationwide chief economist Martin Gahbauer in a statement. “Even though workers who have been forced from full-time employment into part-time work will have experienced a reduction in income, the impact has been less severe than it would have been if they had lost their jobs completely.” Gahbauer added: “Together with the fact that mortgage rates have fallen sharply as a result of base rate cuts, this has meant that far fewer borrowers have fallen into arrears than would normally be the case in such a deep recession.” Write to Diana Golobay.

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