It looks as though we cannot entirely escape America’s sub-prime woes after all as the ripple effect works its way across the Atlantic. After months of sub-prime troubles in the US, the contagion is now affecting the UK, first, via jitters in the stockmarket and now through sub-prime lenders refusing to provide funding to new customers or imposing higher lending rates on adverse products.
DB Mortgages, Infinity Mortgages and Unity Homeloans withdrew their sub-prime ranges and then Edeus and Mortgages plc said they are repricing their sub-prime range. GMAC-RFC is also repricing but it says the timing is pure coincidence rather than down to market instability. In some cases, the rise in rates will be as much as 1 per cent.
Given that rates on sub-prime products had fallen significantly as more lenders entered the market, it could be argued that rates are returning to more realistic levels. These are riskier products to riskier borrowers, which should be reflected in the pricing.
UK sub-prime lenders have not been anything like as gung-ho as their US counterparts but there is no harm in reassessing the market from time to time. Borrowers with poor credit histories are likely to find it harder to get a mortgage. If they have the odd blip, it should still be possible to get funding although it will cost more than in the past but if there have been severe problems, then it may now be impossible.
There is an argument, and it is a strong one, that those with severely impaired credit histories should not be buying a property in the first place. If they have struggled with a mortgage in the recent past, surely it is important to take a step back to build up a good credit record before having another go? But, on the other hand, there are those who have been unfortunate with their credit histories, missed the odd payment here or there or had a disaster in their personal life that temporarily affected their ability to pay which has since been rectified. They should not be penalised as heavily as those with recurring credit issues.
To make matters worse, the Council of Mortgage Lenders has announced higher repossession figures. Nearly 18 per cent more properties were repossessed in the first six months of this year compared with the previous half-year and nearly 30 per cent more than in the first half of 2006. The CML believes that the increase in sub-prime lending is one of several reasons behind the spike in repossessions. It is important to put this into perspective as repossessions have been at extremely low levels and the number remains low by historical standards.
The market may be a bit sticky at present but good brokers can still thrive. There is so much choice available to borrowers in terms of fixes, trackers, flexible loans, etc, that the savvy broker should still be able to find a suitable solution for the client.
Brokers have an important role to play in the sub-prime market. They can assess whether a client could actually qualify for a cheaper, mainstream residential deal. By looking at the client’s situation and history, they will know where to advise caution where necessary. They should be helping the client find a product that does not overstretch them and gives them a chance of being able to keep up with repayments this time around.
Clients need to be educated too, reminded of the importance of not sticking their heads in the sand if they get into financial difficulty or simply hope the problem goes away of its own accord. It is vital that they do not let their credit record go bad in the first place but if unfortunately they do, there are opportunities for the broker who is there to pick up the pieces.
Mark Harris is managing director of Savills Private Finance