The squeeze on credit is beginning to find its way through to UK consumers. Prospective home buyers with poor credit histories are finding that lenders have tightened their loan criteria after the collapse of the sub-prime market in the US.
There is also bad news for those who already have a sub-prime mortgage in the UK. It looks as though they’re in for substantial rate rises.
In addition small companies may notice a hardening of attitude by banks, especially as the Competition Commission has said it is to lift price controls on services the UK’s four largest banks provide to small and medium-sized businesses, a move which will allow the banks to lower the level of interest on deposit accounts below the level set in 2003.
Sub-prime mortgages are sold to people with poor credit histories and thus a greater chance of defaulting. In the US as interest rates have risen defaulters began to appear and the housing market began to fall leading to more defaulters. Funds at investment banks collapsed, and this has led to worldwide nervousness with regard to credit.
UK sub-prime lenders are now tightening their criteria, in a bid to stop the same thing happening to them. Some lenders have announced rises in the last week of between 0.5% and 2.5%. The loans are already more expensive than normal mortgages and this will make life tricky for sub-prime consumers.
Until recently it seems that lenders were offering mortgages to almost anyone who asked. In July the Financial Services Authority (FSA) criticised some mortgage lenders and brokers who were offering loans to people without checking whether they could afford them. Any lender who specialises in lending to higher-risk customers is regulated by the FSA.
The Council of Mortgage Lenders (CML) recently analysed this section of the mortgage market and concluded that sub-prime lending in the UK was far less risky than had been in the US.
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