The sub-prime mortgage returns to the UK property market
As if to confirm the fact that many investors have very short memories there are signs that the sub-prime mortgage is making a return to the UK property market. Many people believe that sub-prime mortgages were a major reason for the US property market collapse back in 2008 and while the sector has been relatively quiet since then, there are signs of a comeback in the UK.
It will be interesting to see how the UK government, and indeed other governments around the world, look to combat the threat of the sub-prime mortgage which effectively charges a hefty interest rate for those with a chequered credit history. Whether there is anything which the authorities can legally do to reduce the burden of these excessive mortgage arrangements remains to be seen but they do pose a real threat to property markets around the world.
Latest rates from sub-prime mortgage lenders
A number of sub-prime mortgage lenders have emerged in the UK offering rates of around 8.55% and a 1.5% setup fee. While these figures themselves seem excessive, compared to traditional mortgage rates, customers will also require a 25% to 35% deposit before they can even apply for this high interest debt. When you bear in mind that UK base rates are at an historic low the only way is up in the medium to longer term and we can only imagine what kind of increase in sub-prime mortgage repayments this would lead to.
Many of us tend to look at the headline figures at the time of taking out our mortgage although when you bear in mind that the vast majority of mortgage arrangements, including this particular sub-prime mortgage deal, are linked to LIBOR, the damage inflicted by evitable medium to long-term interest rates increases could be catastrophic. We can only hope that those who are looking at the sub-prime mortgage sector are fully aware of the long-term consequences of these particular deals and the fact that if their credit rating is “chequered” they could be locked in for the duration with no chance of refinancing at lower levels.
Quote from PropertyForum.com : “The average price of a house in the UK has broken the £200,000 barrier, the highest recorded price in over three years, according to new research.”
What will this do to the UK property market?
There is no doubt that the more finance available to potential property buyers across-the-board the more this will squeeze UK house prices higher and higher, unless we see a dramatic increase in housing stock for sale. The fact that some of this finance may be high interest debt is neither here nor there in the short term but there is no doubt that sub-prime mortgages have the distinct potential to cripple some areas of the UK property market in the longer term.
In many ways those who have had problems with their credit history are stuck between a rock and a hard place and while sub-prime mortgages do have a role to play, quite how lenders can justify rates of 8.55% remains to be seen. In simple terms, on a £150,000 mortgage this would equate to a monthly payment in excess of £1200 which is roughly double what you might expect from a traditional variable rate mortgage. We have looked at a number of sub-prime mortgage arrangements available in the UK and some of these are available with a minimum income of just £25,000.
Conclusion
As more and more sub-prime mortgage arrangements emerge, and they ultimately will, it will be interesting to see how the UK government, the Bank of England and the mortgage industry as a whole respond. There were significant lessons to be learned from the 2008 US mortgage crash, which began when the sub-prime mortgage market collapsed after years of “easy money” for those operating in this niche sector, and we can only hope that those in the mortgage arena and the UK authorities have a longer memory than some investors.
A number of experts are also concerned that the emergence of sub-prime mortgage arrangements further support the theory of a buying frenzy in the UK property market. Why else would investors be looking to tie themselves down to mortgage rates of 8.55% per annum?