by Mark Johnston
The sub-prime mortgage, which ‘torpedoed’ the housing market, turned the global banking system toxic and triggered the biggest financial crisis since the great depression, looks set to make a comeback!
Most borrowers are now struggling to find an affordable mortgage unless they have a spotless credit record or large spare equity in their properties; right now it seems anything above a 90% loan to value (LTV) is effectively considered sub-prime.
John Wriglesworth, managing director of the Wriglesworth Consultancy believes that with out the return of a healthy sub-prime sector “we are not going to get a normal housing market” and that more lenders need to bring back more specialist lending to provide a mix in the market.
A few experts echo his thoughts and think that lenders are only doing the safest lending, but they need to move the goal posts towards being more flexible.
Kensington, a specialist mortgage lender has recently announced a range of ‘recession busting products’, which are designed to help borrowers with modest credit problems, but they deny they are sub-prime mortgages.
Harvey Jones of lovemoney.com welcomes the timid return of sub-prime mortgages, especially now when people who have taken a financial hit due to the global economic woes rather than their own recklessness, deserve the chance to get back on their feet and onto the property ladder.
Many borrowers who may go down this route can re-mortgage to a lender with a lower interest rate once their credit score has improved, although some of these mortgages do hold hefty pre-payment penalties, which means a large sum to pay should they wish to pay off the loan or re-finance during an initial period of time, sometimes as much as 6 months worth of interest.
These particular mortgages may have led many down the road to hell, but they were designed with the best of intentions, such as helping people with past credit problems buy a home.
In early 2000 the sub-prime-prime mortgage was coming to the forefront in the UK. Sub-prime mortgages were designed to help ‘upstanding folk’ who ran in to financial trouble due to illness, divorce or redundancy. Lenders charged slightly higher rates to reflect the extra risk involved.
It all went pear shape when during the credit boom brokers and lenders competed to offer ever cheaper loans to ever riskier borrowers. Some lenders even offered first time buyers 125% mortgages which instantly plunged them in to negative equity.
Many lenders and brokers alike also inadequately assessed consumer’s ability to afford a mortgage and their suitability for a mortgage, which resulted in the approval of potentially unaffordable mortgages. These poor sales practices in the market lead to serious wider consequences.
Everyone has suffered as a result, more so the honest borrower for whom these products were designed for in the first place, as they can no longer get the loan they desperately need.
The thing to remember is that specialist mortgage products do not kill economies……lenders, brokers and regulators do! Therefore should sub-prime mortgages be banned forever or welcomed back?
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