Sub-prime borrowers on variable-rate mortgages could face a massive payment hike after the spread between bank base rate and three-month Libor reached a 20-year high last week.
Hamptons managing director Jonathan Cornell says that many sub-prime borrowers will face a hit when lenders start to reset their variable-rate sub-prime loans in the coming months and the industry could see further big rises in arrears.
He says: “I expect that we will see a lot of lenders repricing if the current Libor rate continues.”
Variable-rate sub-prime loans are usually indexed to a specific market rate, either bank rate or three-month Libor, and are reset from time to time according to the terms of individual contracts. The Council of Mortgage Lenders says they are typically reset once a quarter.
The spread has widened recently between the bank base rate which stands at 5.75 per cent and three-month Libor which is now 6.88 per cent. It means that borrowers whose rates are reset during this period are facing a big increase in payments.
Fixed-rate borrowers due to come to the end of their term who revert to a Libor-linked variable rate could also experience a big payment shock.
The CML says the current market conditions point to a reduction in the financing options available to some sub-prime borrowers and the potential for an increase in payment shock as borrowers move on to new rates.
John Charcol senior technical manager Ray Boulger says that if the Libor rate does not start to decrease soon, lenders will use it as a catalyst to increase their standard variable rates.
He says: “We have not seen significant movement in the market yet with tracker mortgage rates but this could change in the coming months if the situation does not get better.”