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Knock on effect of US sub-prime mortgage meltdown on UK market

23 August 2007 / by None
Potential homeowners with bad credit histories are going to find it a lot harder to get a mortgage as a result of the sub prime mortgage crisis in the US.

Aggressive mortgage brokers and naïve consumers in the US striving after the American Dream of ownership, has seen people borrowing far more than they can afford, which has in turn led to a massive increase in the number of houses being repossessed.

Consequently, many American lenders have reviewed their lending procedures, hiking their rates and becoming more vigilant in who they lend to. Some, such as Wells Fargo – America’s number one retail mortgage lender – have closed their sub-prime lending sections altogether, and Accredited Home Lenders have ceased accepting new applications and are cutting 1,600 jobs due to rigorous restructuring of the company.

And now there is bound to be a knock-on affect in Britain. Not only are UK sub prime lenders getting a wake up call, but UK companies with investments in the US are going to feel the squeeze. HSBC, for instance, has announced that 600 of their employees will lose their jobs in an attempt to trim expenses, and other global banks are following suit in order to increase liquidity.

There has been widespread losses amongst investors in recent days, which has caused banks to rapidly rise the rates which they charge each other, illustrating the panic and uncertainty over the questionable creditworthiness of even the largest financial institutions.

Many lenders in the UK have already tightened their loan conditions in response to the US financial slump, particularly in the sub prime market, due to fears that the same thing is going to happen in this country.

Victoria Mortgages has re-priced its entire product range, with near-prime products rising by 1.25% and sub-prime products going up by 2.5%; Northern Rock mortgages will be rising its sub-prime fixed rates by up to 1.25 per cent from August 29, and most lenders are putting their rates up by between 0.5% and 2.5%.

The threat that this situation could present to UK borrowers is real, explains James Caldwell, director of online financial information portal Fair Investment Company.

“Sub-prime, or bad credit mortgages are already more costly than standard home loans because of the extra risk they hold for lenders.” he said.

“But now, largely as a result of what has happened in America, mortgage deals are becoming increasingly more expensive for people with bad credit histories, for whom a sub-prime home loan was the only option, but who could now find themselves refused a mortgage altogether.”

Find out more about bad credit mortgages