Frontier Mortgage Funding 2026-1 finalizes ratings on UK RMBS notes

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Frontier Mortgage UK RMBS Ratings

Highlights

Fitch assigns Frontier Mortgage Funding 2026-1 plc final ratings, with Class A at AAAsf and Class X at BB+sf, based on pool and structure quality.
The mortgage pool comprises 91.9% seasoned owner-occupied and 8.1% buy-to-let loans, with 8.3% restructured, 8.2% over three payments overdue, and 0.7% defaulted loans.
Hedging structures may lead to over-hedging if defaults or prepayments increase, with Fitch capping annual prepayment assumptions at 40% for its risk analysis.

Final ratings reflect pool and structure

As reported by Fitch Ratings, Frontier Mortgage Funding 2026-1 plc receives final ratings on its notes after earlier expected ratings, with the Class A notes rated AAAsf, Class B AA+sf, Class C A+sf, Class D A-sf, Class E BBB-sf, Class F BB-sf, Class G B-sf and Class X BB+sf.

The static securitisation contains a mixed pool of seasoned owner-occupied loans, representing 91.9% of the balance, and buy-to-let loans, representing 8.1%, all originated by Santander UK Plc. Santander UK remains the legal title holder and servicer of the assets.

Fitch says the mortgage pool has a weighted average seasoning of 8.5 years and a credit profile broadly in line with prime RMBS transactions. At the same time, the agency highlights weaker characteristics in the selected pool, including 8.3% restructured loans and 8.2% of loans with more than three payments in arrears, while 0.7% of the balance is reclassified as defaulted.

Hedging and prepayment assumptions shape risk analysis

At the end of March 2026, 83% of the loans pay a fixed rate that later reverts to floating, while the notes pay a SONIA-linked floating rate. To reduce the mismatch, the issuer enters into a swap at closing, although Fitch says the defined notional balance can create over-hedging if defaults or prepayments occur, potentially reducing available revenue funds when interest rates fall.

Fitch also applies an alternative high prepayment stress because fixed-rate loans are subject to early repayment charges and are likely to prepay around their reversion dates. The agency caps the prepayment rate used in its analysis at 40% a year.

The rating review also considers product switches on the underlying loans. Non-forbearance product switches granted by Santander UK will be repurchased from the pool, while fixed-rate switches for borrowers in arrears remain in the transaction, and additional hedging is required if fixed-rate loans exceed the existing swap notional by 5% of the pool balance.

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