A GROUP of researchers at the University of Edinburgh has found that extreme weather can have an influence on mortgage payments.
Research suggests that people’s ability to meet mortgage payments may differ depending on the type and intensity of extreme weather when cyclones and floods hit populated areas.
Borrowers have a greater chance of missing, delaying or feeling discouraged to pay off their mortgage early when dealing with heavy rain and powerful cyclones.
Researchers say that it is increasingly important to factor extreme weather risks into mortgage calculations as the effects of climate change are becoming more frequent.
The team at the University of Edinburgh used data from nearly 70,000 mortgages and over 3.5 million single payments to show the probability of mortgage risk in Florida when hit with heavy rain and tropical storms.
The goal was to combine the mortgage performance and characteristics over time, and the data on extreme weather, to help lenders predict if a loan will be paid and whether a loan will be paid off.
Professor Raffaella Calabrese, of the University of Edinburgh Business School, said: “The new credit scoring models we developed for the study showed it is possible to significantly improve the predictive accuracy of default and prepayments on mortgages when we include weather-related risks.”
It was found that the likelihood of defaulting on a payment more than doubled for a category three hurricane compared to a category two.
In areas where heavy rain and flooding are common, the willingness of borrowers to pay back their mortgage early decreased. However, tropical cyclones had no significant effect on borrowers’ likelihood to prepay their mortgage.
Professor Calabrese said: “Our results suggest that extreme weather leads to substantial changes in risk and against this background it seems necessary to systematically account for this in credit risk assessment.”
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