Sub-prime borrowers could be trapped
The contraction of this section of the market will almost certainly affect those borrowers hoping to move from a sub-prime deal to a standard mortgage over the next year. Darren Cook, mortgage expert at Moneyfacts, said: “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.”
He added that up until July 2007, many lenders were adding sub-prime products to their ranges to cater for those borrowers with blemishes on their credit files. There was also an influx of new lenders offering exclusively sub-prime mortgages. However, since the credit crunch hit the UK mortgage market this time last year, lenders have struggled to fund this type of lending and so the market has shrunk to include just 13 providers, from 36 of July 2007.
Rates have also been affected, according to Cook. “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,” he added.
While some sub-prime borrowers may be able to access a standard residential rate when they remortgage, Cook has warned that others may be left on their lender’s Standard Variable Rate. “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.”
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