Sub-prime conundrum

Darren Cook, mortgage expert at Moneyfacts.co.uk, comments: "Up until July last year the sub-prime market was a growing sector offering 8,148 sub-prime residential mortgage products compared with just 1,252 today.

"Many lenders realised that there was an ever increasing number of people with blemishes on their credit files. Existing lenders added sub-prime products to their range and there was an influx on new lenders offering exclusively sub-prime mortgages.

"As a result of the much publicised difficulties in funding this type of lending, the number of lenders offering such products has dropped from 36 in July 2007, to just 13 today.

"Last year the market for sub-prime was so competitive that some rates being offered were only fractionally higher than standard residential rates. Now, as lenders continue to factor in margins for higher risk, sub-prime customers are paying the price with rates up to 2.75% higher than the same time last year.

"Many borrowers on a light level of sub-prime assumed that if they kept on top of their financial affairs once their deal ended they would be able to move to a much cheaper standard residential deal, but due to stricter lending criteria from prime lenders this isn't necessarily the case.

"If they can get a standard residential deal their new repayments could potentially drop as a better deal currently available on a two year fixed stands at 5.54%.

"Of those that can't get a new standard residential deal, they will need to try and find a new sub-prime deal or have no alternative other than moving onto the revert to rate of their existing deal. With this rate currently standing at 9.43% this could prove costly.

"Borrowers could be facing up to a £360 hike in their monthly repayments, which could be a step too far for the majority. As a result we are likely to see more people facing the prospect of repossession as more and more deals come to an end in the near future."