Saturday, November 24, 2007

Sub-prime ‘time bomb’ is set to explode in Britain

Lenders are cracking down on sub-prime borrowers across Britain and could force tens of thousands of homeowners into forced sales of their homes, property experts warned yesterday.

The global credit crunch provoked by the crisis in American sub-prime mortgages is creating a time bomb in Britain’s own market for loans to borrowers with imperfect credit records.

The warning came as figures from the British Bankers’ Association (BBA) suggested that the slowdown in house prices was on course to be the most severe in at least a decade, as would-be buyers take fright at a declining market.The number of mortgages approved in October for home purchases by the BBA dropped by 17 per cent over the month to only 44,105, the lowest figure since the body began to compile figures in September 1997. Approvals were 37 per cent lower than a year ago.

Experts fear that the emerging British sub-prime crisis could further destabilise the domestic property market. As existing homeowners with particularly bad credit records – known as “heavy” sub-prime customers – come to the end of the cheap two-year fixed deals that were readily available until the summer, lenders are refusing to offer similar deals.
In the past, heavy sub-prime borrowers could find a cheap deal if their loan was equivalent to 95 per cent of the value of their home – but the loan-to-value (LTV) ratio has dropped significantly.

Bob Sturges, of Money Partners, a sub-prime lender, said: “These are people who before the credit crunch would have been able get a maximum of 95 per cent LTV. Now the maximum they can get is 75 or 80 per cent. When they come off their fixed-term deal they are going to be disenfranchised from the beneficial rates they have enjoyed. If they can’t afford the higher rates, they face the prospect of selling up and joining the rental sector. This will affect tens of thousands, if not hundreds of thousands of people.”

Those who have insufficient equity in their homes and who do not have the cash to make up the shortfall will be forced to pay their lenders expensive Standard Variable Rate (SVR).

Two years ago, borrowers could snap up a two-year fixed-rate deal for heavy adverse borrowers of 6.58 per cent. Hundreds of thousands of homeowners face being moved on to their lender’s higher rate, which typically will be at 9.5 per cent. On a £150,000 mortgage, this will leave homeowners facing an extra £280 a month in loan repayments. Thomas Reeh, of Black & White Mortgages, the sub-prime broker, said: “There are very difficult times ahead for customers who are habitual defaulters, or heavy sub-prime. They are unlikely to get a new competitive deal, and face significant pressure from their existing lender.”

The higher cost of all mortgages, prime and sub-prime, in the wake of rises in interest rates and the credit squeeze has also put people off from dipping into their housing equity to fund big purchases, in a worrying sign for the retail sector as the Christmas season approaches. Mortgages not for house purchase or remortgage fell to 38,471 in October, the lowest figure since May 2000.


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