Sub prime showing cracks

Julia Harris, mortgage expert at Moneyfacts.co.uk, comments: “While its a little too early, for the prime mortgage market to be affected by the stock market turmoil, the sub prime sector is beginning to show cracks.

“Victoria Mortgages has withdrawn its sub prime range, GMAC-RFC increased rates by 0.75%, Mortgages Plc increased rates by up to 1% and Northern Rock by up to 0.55%. SALT will no longer considering applications from borrowers with any arrears in the last three months.

“It’s little surprise that sub prime lenders are resorting to rate rises and tightening their credit criteria as the credit crunch starts to take hold. Almost anyone can obtain a mortgage, no matter their credit position or employment status as long as they are prepared to pay a premium by way of an increased interest rate. Many of the near prime deals offer very competitive rates, not too far out of line with the prime market. However, while these borrowers may only have minor debt issues at the start, over time their credit position could worsen if they are not given the appropriate support from the lender, driving them further in to the sub prime market.

“Whilst the housing market has been buoyant and borrowers are not stretching their income beyond reasonable limits, the sub prime market has been a lucrative and fairly safe bet for lenders, especially as their target market continued to increase in size. But this hit has been from an external influence, beyond the control of lenders here in the UK. Today’s financial markets are global, which to some degree places us at the mercy of the world’s economies.

“Specialist sub prime lending is often backed by large investment houses, who will feel the brunt of the instability and falling investment returns. Take the example of Alliance & Leicester, whose prime products have seen a fall in rates, whereas their specialist mortgages, sold to investment banks have risen over the last week. So with variations between who owns the debt lenders will undoubtedly respond in different ways.

“It’s a sign of the times that the Bank of England has been forced to use its position of lender of last resort and offer a helping hand, granting a £314m loan at 6.75% to an unidentified lender.”