Non Status and Sub Prime Mortgages
Non status or Sub Prime Mortgages are often known as bad debt or bad credit mortgages. They have been in the news recently because of America’s problems with its sub prime mortgage market.
Sub Prime lending means lending to people with bad credit histories. (e.g. those with missing credit card payments, unauthorised overdrafts e.t.c.) It can also apply to people on very low incomes without bank accounts.
Loan sharks are an extreme example of non status / sub prime lending. This type of lending is geared towards those with no bank accounts and is often unofficial. Interest rates have known to be extortionate; up to 50%
Sub prime mortgages are similarly mortgages for people with bad credit histories. It involves getting an unconventional mortgage like a self certification mortgage (income doesn’t have to be proved).
Because sub prime and non-status mortgages are geared towards people with bad credit histories they are more risky for the lending institution. Therefore as a financial compensation for the bank they will usually charge a higher interest rate than on a mortgage with good credit history.
UK Sub Prime Mortgages
In the past year there has been a big growth in the non status – sub prime market. In particular it is worth checking out deals from HSBC, Royal Bank of Scotland and the Alliance & Leicester. These banks have been targetting the sub-prime market.
Problems with Sub Prime Mortgages in US
There has been a record amount of bankruptcies in America involving lenders involved in sub prime mortgage lending. For example HSBC revealed at the start of March that it had to write of over $10.5bn in bad debt. This is largely because of defaults of sub prime mortgages.
Part of the problem in America was that in recent years house prices rose much faster than the rate of inflation. With rising house prices and historically low interest rates, lenders were encouraged to lend more generous payments and give more risky mortgage deals. However now that house prices are falling and interest rates potentially rising it makes the likelihood of further debt default likely.
This is also a potential problem in the UK. House prices have been consistently rising due to constraints in supply but the average house price to earnings ratio has increased making them overvalued. Therefore it is possible house prices could fall in the future. This would definitely make the lending institutions think more carefully about lending to “risky borrowers”
Sub Prime mortgages are generally more susceptible to a period of rising interest rates. This is because the mortgage interest payments for those with a sub prime mortgage are generally a higher % of their disposable income than those with a standard mortgage.