Sub prime lending

Most of us have noticed the media reportage of the US sub prime sector crisis. Following 17 interest rate rises since June 2004 defaults on mortgage payments have become common, especiallly in the "sub prime" sector where affordability limits were already stretched. Borrowers in this sector just do not normally have the resouces to fund interest rate rises. This has led to reduced income for sub prime lenders and because these lenders are funded by large investment banks, these are also affected. Hence the wobble on the stock markets.

So how does that affect us this side of the pond? The UK sub prime market has grown enormously over the last few years. From a starting point of just three or four specialist lenders there are now 31 sub prime lenders known to the author. Almost anyone has been able to obtain a mortgage despite poor credit histories or employment status, although this ususally means paying more for the privelage. Whilst the housing market has been booming and homeowners have seen large increases in equity, the sub prime market has been a sought after cash cow for lenders.

As the UK sub prime sector starts to look more like that in the US, lenders have started to react by increasing rates, usually by at least 0.5%. Other lenders are reducing the amount they are prepared to lend against the property valuation (LTV), or have reduced the amount of defaults or other credit problems that they are prepared to accept.

So will it still be possible to buy a property, or remortgage, in the future if you have a blip on your credit history? There will undoubtable continue to be lenders specialing in sub prime mortgages and remortgages but consumer choice is likely to be severely reduced in the future. It will be more important than ever to obtain advice from a broker who is truly independent and can access all of the lenders on the market.

Jerome Thompson Cert PFS http://www.you-can-remortgage.co.uk/