Many people will remember the effects of the recession the UK went through in the late-2000s. This was thought to have been triggered by a product called a sub-prime mortgage. This is a mortgage that is offered to those who would be rejected for a traditional mortgage. This is usually because the individual has a poor credit history and would not be accepted according to the traditional checks and terms that apply to a regular mortgage.
Since sub-prime mortgages attract a much higher interest rate, any rise in rates can easily trigger numerous defaults on sub-prime mortgages. This in turn is what is thought to have led to the recession occurring in the US and beyond. It may come as a surprise then to learn that some lenders are now offering sub-prime mortgages once again.
Why are these mortgages back on offer?
It would seem foolhardy for lenders to offer the very product many believe led to the financial crisis in the first place. However some have said the product provides a ‘lifeline’ to those people who would not be able to get a mortgage in any other way.
However, is this really such a smart idea? Interest rates are at rock-bottom levels at the moment. There have however been warnings that they could potentially rise in the near future. The rates given on sub-prime mortgages are much higher than they would be on a traditional mortgage, simply because of the added risk posed to the lender. Rates can be as high as around 8% – a massive hike when compared to the best rates given on traditional mortgages.
Will checks be made?
Lenders that are offering the chance to get a loan like this are looking for proof of why the applicant ran into financial difficulties in the past. For example, someone who was ill and out of work, or made redundant, might qualify for one of these loans. However if there was no real reason why they ran into financial problems, they would likely be rejected for the sub-prime mortgage they were applying for.
Who is offering these mortgages?
Companies including Aldermore, Magellan Homeloans, Precise Mortgages and Bluestone are all in this area of the marketplace. The term ‘sub-prime’ mortgage has become something of a swear word though, so alternative terms are now being used. While the mortgages fell out of favour for a few years, they are now coming back under another name. You can expect to see mortgages of this kind offered to people who have adverse or poor credit histories instead.
Anyone applying for such a loan must generally be able to prove their arrears, bankruptcy or default occurred over a year ago. The time period can change depending on the lender, but the general idea is that the applicant must be able to prove there was a reason for the issue and that the reason is now resolved.
It remains to be seen whether these mortgages cause any problems in the wider sense of the economy – especially when interest rates do eventually start to rise.