So what’s all the fuss over subprime mortgages?

 

The term ‘subprime mortgages’ is still ringing in homeowners’ ears since the summer of 2007 when the credit crunch took hold. But, unless you work directly with mortgages or within the money markets, it can be difficult to decipher what is really going on. Although the story started at subprime mortgages – and from the other side of the Atlantic – this is not where it ends. In fact, homeowners here in the UK, even if they have never heard of subprime mortgages, can be affected by the credit crunch as filters its way down the home-owning chain on both continents. So what do you need to know about subprime mortgages and how might the credit crunch affect you?

 

What happened with subprime mortgages?

In the USA, mortgage lenders of subprime mortgages work differently to this side of the Pond. They are willing to lend over a longer period to arguably less financially stable borrowers and using a method of balloon payments, where subprime mortgages interest rates start off cheaply – but double after a certain amount of time.

 

Banks can do this because the model for the lending of subprime mortgages has changed in recent years. Whereas banks traditionally financed their mortgage lending through the deposits they receive from their customers, they now sell subprime mortgages onto the global bond markets. This is affecting the liquidity (or access) to loans on the wider global money markets. The result is that UK lenders – especially those offering subprime mortgages – are reining in lending criteria, while some have turned their back on dealing in subprime mortgages altogether.

 

Is it just subprime mortgages that are affected by the credit crunch?

The effects of the credit crunch are not confined to subprime mortgages. Other high risk loans such as 100 per cent mortgages or self-certification deals are also being affected, while lenders are looking more closely at borrowers’ credit scores even for mainstream loans. This is why, especially if you are a non-standard borrower looking at subprime mortgages, it is more necessary than ever to seek out the advice and expertise of a mortgage broker that specialises in the area, such as The Mortgage Broker Limited (TMBL).

 

But what exactly are subprime mortgages?

As their name promises, subprime mortgages, which are also known as adverse credit, impaired credit or non-standard, are designed to cater for borrowers with a low credit score on their personal credit file. This file is held (though not determined) by one of three credit reference agencies in the UK; namely Experian, Equifax and CallCredit. There are three primary levels of subprime mortgages; light, adverse and heavy with several ‘shades of grey’ in between. But fundamentally, where you pitch on this scale will determine the amount you pay.

 

Why would I need to look at subprime mortgages?

Subprime mortgages are the mortgages of last resort. They may be the only deal you can get if your credit shows that you have missed any payment due. This could be on a previous mortgage down to small payments like mobile phone bills or minimum repayments on your credit card. However, as lenders of subprime mortgages earn a tidy fee every time they arrange the deals, there is a real risk of being sold a product from a range of subprime mortgages, when you didn’t require one. Seeking help from an experienced broker like TMBL will prevent this from happening – and if you do need a subprime mortgages deal, it will find you the very best one for your circumstances.