UK Sub Prime Crises, Mortgage Rates

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Sub-Prime, Schmub- Prime? Crisis, what crisis?

Alarming headlines on the sub-prime crisis have been filling our newspapers. “Mortgage meltdown”, “Financial meltdown hits the City,” and so-on. But beneath these headlines, what really is going on? Do events in the US really spell trouble for the UK mortgage borrower or is the gloom and doom overdone.

Let’s get our terms right

There’s lots of confusion over terms. In the USA, `sub prime`, because of lax regulation , easy credit and a boom in housebuilding included many people with low incomes or jobs which seemed secure in good economic conditions. In the UK it’s just a hold –all term for people who don’t fit the profile of High Street Banks and Building societies such as the self-employed or people with varying work patterns and a whole range of other types. They are known as the `non conforming` sector and it doesn’t mean they have low incomes or credit problems. Then there are those with poor credit histories, the `adverse sector`, particularly important in the US situation.

What did happen in America?

The boom encouraged unwise lending to these `sub-prime` groups. These mortgages often started at very low rates which after a fixed period then rose sharply because of rising bank rates combined with lenders increasing margins.. Whilst in the UK at the end of a fixed period rates may go up by say 2%, in the USA the result was much greater increases.

But despite all that, repossessions in the US are still only a relatively small proportion of the total housing market. House prices are falling but so far by less than 10%.

Why has it affected other countries?

What internationalised this local US problem was that many of these `sub prime ` mortgages were bundled into packages and sold to financial institutions around the world; banks, insurance companies, pension funds, hedge funds and so on. With these borrowers started to default and their house prices moving into negative equity the value of the packages went down.

So could it happen here and what has been the effect on the UK

The UK `sub-prime` market is different,. Over 70% of Britons are owner occupiers.. This figure has changed little in recent years, the last big jump being in the Thatcher era. So there has been no huge influx of people buying beyond their means.

Income multiples have risen from the traditional figure of about 3 to about 4. But incomes have risen by 13% over the last three years.. Here prices are still steady although the rate of price increase has slowed recently. There are few signs yet of actual falls, let alone sharp ones and many experts still predict increases.

The UK’s fundamentals, a growing population, more household unit formation and a low new building rates compared to increasing demand have not changed.

What is happening in the UK?

Most experts agree that there is no `sub prime ` crisis. Repossessions are rising ( up 30% on 2006) but are still only a small percentage of homeowners. Recent data from the Council of Mortgage Lenders and the Ministry of Justice shows that the numbers in arrears actually fell 3% and court actions for repossession also fell.

Recent rises in interest rates are causing monthly mortgage repayments to rise. Lenders are also taking the opportunity to restore their margins in the sub-prime market. But there has been no mass default and repossessions are well below 1990-1993’s numbers. It is estimated that fixed deals for some 2 million homeowners will expire in the next 6 months,. But incomes will also have increased as typically 2 to 3 years will have elapsed since the loan started. A recent Council of Mortgage Lenders’ report predicted that most homeowners would continue to cope.

Because liquidity amongst lenders is tighter, mortgages may be a little more difficult to obtain. This will not affect the bulk of homeowners who already have a mortgage and generally are not looking to move

Lenders are also tightening up their criteria on income, the amount of the loan and so on. So expect to find questions a bit more rigorous. Increasing regulation by the FSA was already producing this effect as it required lenders and intermediaries not to encourage borrowers to take unwise loans.

Lastly Lenders serving the non-conforming market are raising interest rates and fees. But in recent years the high street lenders have been doing this too.

Is there a silver lining?

The mortgage market won’t come to a complete halt. Lenders still want to lend, so loans may be a bit more expensive or difficult to get but will still be out there.

Creditworthy borrowers who have a decent deposit will also find themselves in demand.

Lastly, because governments and central banks fear that the problems in the money markets might lead to recession many experts are predicting that the Bank of England may actually cut interest rates. That would benefit millions of homeowners, new borrowers and those remortgaging..

What should I do if I’m looking to move or for a remortgage?

In the words of Corporal Jones in Dad’s Army, “Don’t Panic”. You may have to save a bit more or lower your expectations a little but you should still be able to find a mortgage. Widen your search. With literally hundreds of lenders in the mortgage market, cast your net as wide as possible. Because lenders` criteria differ widely you may find the multiplicity of possibilities confusing. One recourse is to approach a mortgage broker who can access the whole market. They should have a good idea of what’s around and who may be willing to help. If you are worried about your monthly payments going up look around; it may still be possible to remortgage over a longer term or find a new deal that keeps repayments down.

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