There has been a lot of talk recently of the sub-prime crisis. However, many are uncertain of what we actually mean by ‘sub-prime’.
Sub prime is more common in the US. In the UK, we are more likely to talk about the adverse credit or bad credit mortgage sector. However, the recent interest in the sub-prime crisis has made the word more commonly used in the UK>
The sub-prime sector refers to those borrowers who have a history of bad credit. This may range from a simple late payment, to several defaults and even bankruptcy.
This sector is seen as more risky because people with poor credit histories are more likely to default in the future. Because of this banks and lending institutions can charge a higher interest rate as a premium for the increased risk.
Therefore, the sub prime sector was often one of the most profitable. However, the sub-prime sectors is often the most affected by rising interest rates. People on low income and poor credit are more likely to be hit by rising interest rates. Therefore, this sector is often more volatile.