Knock on affect of US sub-prime mortgage meltdown on UK market

Potential homeowners with bad credit histories are going to find it a lot harder to get a mortgage as a result of the sub prime mortgage crisis in the US, warn financial experts.

Aggressive mortgage brokers and naïve consumers in the US striving after the American Dream of ownership, has seen people borrowing far more than they can afford, which has in turn led to a massive increase in the number of houses being repossessed.

Consequently, many American lenders have reviewed their lending procedures, hiking their rates and becoming more vigilant in who they lend to. Some, such as Wells Fargo – America’s number one retail mortgage lender – have closed their sub-prime lending sections altogether, and Accredited Home Lenders have ceased accepting new applications and are cutting 1,600 jobs due to rigorous restructuring of the company.

And now experts are saying there is bound to be a knock-on affect in Britain. Not only are UK sub prime lenders getting a wake up call, but UK companies with investments in the US are going to feel the squeeze. HSBC, for instance, has announced that 600 of their employees will lose their jobs in an attempt to trim expenses, and other global banks are following suit in order to increase liquidity.

Paul Niven, Head of Asset Allocation at F&C, says that the crisis emanating from the sub prime lending ‘carnage’ in the US is spreading. "Recent days have seen both rumour and confirmation of widespread losses amongst investors, particularly hedge funds, and the decision by many to close the window for investors to exit loss-making funds has led to panic over the breadth and depth of the problem.

“This has culminated in banks ramping up the overnight rates which are charged to each other for loans due to mistrust and uncertainty over creditworthiness of even the biggest financial institutions.”

Many lenders in the UK have already tightened their loan conditions in response to the US financial slump, particularly in the sub prime market, scared that the same thing is going to happen in this country. Victoria Mortgages has re-priced its entire product range, with near-prime products rising by 1.25% and sub-prime products going up by 2.5%, and most lenders are putting their rates up by between 0.5% and 2.5%.

The threat that this situation could present to UK borrowers is real, explains James Caldwell, director of online financial information portal fairinvestment.co.uk

“Sub-prime, or bad credit mortgages are already more costly than standard home loans because of the extra risk they hold for lenders.” he said.

“But now, largely as a result of what has happened in America, these mortgage deals are becoming increasingly more expensive still.

“There are many people for whom a sub-prime home loan was the only option, who could now find themselves declined the level of mortgage they want, or refused a mortgage altogether.”