Credit rating agency Moody's has warned that negative equity is set to become a significant factor driving defaults by mortgage holders.

The principal factors which drive defaults are evolving, according to the credit rating agency, and key drivers of defaults are likely to be a combination of loan-to-value (LTV) ratios, affordability, employment status and location.

So far, defaulting Irish borrowers have typically been self-employed, living outside Dublin and had their mortgage originated during the peak of the market in 2006-2007. However, it says, the severe downturn in the economy will have a lasting impact on the performance of residential mortgage loans.

Although LTV's have so far not been a significant factor in defaults, the report says the severity of the recession and sluggishness of the housing market means options have been restricted for those who get in arrears. The report also notes with over half of all mortgage loans set to enter negative equity, default rates could still rise higher on LTV ratio loans.

The report also says that an expected rise in interest rates will also have a large impact on delinquencies, as affordability is weakened further. Unsurprisingly, the report says that with unemployment only now reaching its peak, recent rises in unemployment are set to have a greater impact on default levels.

Finally, Moody's says that geographic location is also highly relevant. The report finds that mortgage performances are widely dispersed across the country, with the major urban areas of Dublin and Cork experiencing half the default rate of certain midland and border counties.