Lenders hike rates for sub-prime mortgages

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Thursday 30th August 2007

Interest rates for sub-prime mortgages have been raised by a number of UK lenders in response to the crisis in the US, it has been revealed.

Unexpected levels of defaults on sub-prime repayments in the US have seen firms overwhelmed in recent weeks.

As a result, companies including Northern Rock, GMAC-RFC, Victoria Mortgages and Unity Homeloans have either raised their rates or withdrawn from the sub-prime market completely, reports the BBC.

Ray Boulger, chief technical adviser at independent mortgage broker John Charcol, told the broadcaster: "Up to now it has been possible - providing you are not bankrupt - to get a mortgage however bad your credit is."

But mortgages at the limits of affordability could be a thing of the past, with Northern Rock raising rates on such deals by up to 1.25 per cent this week.

Communications director Brian Giles suggested that the decision might prove a short-term protection against market volatility.

"It has been a tough time in the credit markets, but we raised a lot of liquidity ahead of this turbulent period," he explained to the BBC.

Oliver Gilmartin, senior economist at the Royal Institution of Chartered Surveyors, predicts both positive and negative effects on the housing market as a whole.

"Tightening borrowing standards in response to sub-prime concerns could intensify the current slowdown in lending activity," he asserts.

But this may not lead to better affordability as "those trying to get a foothold on the property ladder may need to stump up higher deposits".

Near-prime mortgages are now being proposed as the best option by some lenders as they address a number of financial difficulties without exposing the provider to as much risk.

Ian Whittaker, marketing director of Mortgages plc, explains that the firm "continues to be committed to the sub-prime mortgage market" and that, as such, it is not withdrawing any products.

But he adds: "We are making adjustments to lending criteria to limit our exposure to higher-risk categories of business."

These alterations include reduced loan-to-value ratios on some products and offering only near-prime specifications to homeowners looking to remortgage to escape existing arrears.

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