The fastest growing sector of home loans market is what we class as
specialist mortgages. Specialist mortgages have developed to serve the mortgage
needs of people who don’t fit into the more conventional model buyer.
In the case of self-employed buyers, the introduction of self-certification
mortgages has made things much simpler. A statement of earnings is normally all
that is needed, provided the business has been up and running for couple of
years. Normally, a 25% deposit is needed and interest rates will be slightly
higher than usual. This is just one example of a specialist produce.
Another type of mortgage, which is causing concern to Citizens Advice Bureaux
(CABs), is designed to serve the needs of people with a poor credit record. It
is known as a sub-prime mortgage, or sometimes called a credit repair
mortgage.
Unbelievably, there are over 4,000 different versions of this product on the
market. There are variable, fixed and discount rates. The mortgages are
extremely complex, higher fees tend to be charged, the amount lent compared to
the value is likely to be lower and interest rates higher than in the rest of
the mortgage market.
The sub-prime mortgage has varying levels. For a would-be buyer who has
missed a couple of loan repayments in their past, it’s likely that a “light” or
near prime version would be offered. If the same person had a poor credit
rating, county court judgements against them or was a discharged bankrupt, then
they would have a “heavier” or sub prime type of mortgage offered.
Dependent on the results of the credit rating, there could be an interest
charge of more than 3% on top of the average standard variable rate mortgage.
There’s a big gap between sub-prime and near-prime. Another snag is the cost of
the fee for setting up the loan. Commonly there’s a charge of 2 to 2.5% of the
loan.
The concern of the CAB relates to the indication that mortgage lenders
specializing in sub-prime mortgages are giving social housing tenants the
encouragement to purchase their homes with mortgages that they simply cannot
afford.
Right-to-buy has resulted in more than 1.6 million council and housing
association tenants purchasing their homes since it was introduced in 1980. It
is thought that recently the surge in the sub-prime market has meant that offers
of loans are being made to riskier customers.
Tenants eligible for a right-to-buy deal get a discount on the value of their
property. This ranges from £16,000 to £38,000, depending on the area. The
vendors of the sub-prime mortgages appear to be persuading buyers to extend
their mortgages and combine current debts. This, combined with the charges and
higher interest rates, quickly erodes whatever gain might have been achieved by
the discount. Many of the clients who approach the CAB with mortgage arrears are
in trouble directly because of this situation. They run the risk that, unable to
keep up their repayments, they will become homeless and will also consequently
lose their right-to-buy position.
There has been a reduction in the number of sales of right-to-buy properties
in the last few years. The Housing Act of 2004 brought in some tighter rules and
restrictions, together with reduced discounts, especially in areas with higher
house prices and higher homelessness levels.
In September 2005, there was a report by the Financial Services Association,
which voiced concern over what checks were employed to check the borrower’s
suitability for these mortgages and questioned the advice given by some brokers.
A further investigation to this is planned.
Incidentally, first time buyers with no credit record will struggle to get
conventional mortgages with competitive interest rates. A history of debt,
repaid promptly, will stand you in much better stead when the time comes for a
mortgage, than no debt at all!
