Subprime Mortgages: Déjà vu All Over Again?

Just when we thought it was safe to go back into the property market… it appears that subprime mortgages, widely implicated in the financial meltdown of 2007-2008, are making a rather surprising comeback in the UK. And some are worried that this is going to push us over the cliff into a fresh crisis.

A relatively new batch of lenders are targeting people who have experienced serious financial problems such as repossession and bankruptcy, as well as those with lesser dings on their credit records. The mortgages these lenders offer carry interest rates as high as 8%, compared to current best-buy rates of as little as 1.54% on conventional loans.

Included in this new group of lenders are Australian owned entities Bluestone Mortgages and Pepper Homeloans, both of which cater to people who have experienced a “credit event” such as missing payments on a previous mortgage. As well there is Foundation Home Loans, offering buy-to-let mortgages to people who have had financial problems. There are several other lenders in this sector, and all argue that they are simply offering a lifeline to people whose financial challenges have caused them to be rejected by the big name high street lenders.

Observers of the trend are justifiably worried. StepChange debt charity’s head of policy Peter Tutton was perhaps pointing out the obvious when he noted, “Last time around, before the crash, there were some really bad lending practices. Certain sub-prime lenders were lending to people who couldn’t afford it and were vulnerable and were being repossessed.” Tutton also said that even though tougher rules are now in place, he expects the Financial Conduct Authority (FCA) to be monitoring this market closely.

Other factors are also putting homeownership beyond the reach of many
As most people who have gone house hunting recently could attest, Britain is in the midst of a housing crisis anyway. In particular it is all but impossible to find anything affordable in London and surrounding areas, as prices are skyrocketing and there is a depleted stock of available houses.

There has been some speculation that London is on course to become the next housing price bubble fatality. A report from Swiss financial services giant UBS has declared that London is the most overpriced market in Europe, at risk of a bubble as a result of “explosive price behaviour” since 2013. (It is worthy of note that in comparison to other European banks, UBS suffered among the largest losses during the subprime mortgage crisis, requiring the bank to raise large amounts of outside capital.)

In any case, for the time being finding anything within one’s price range in London and other major metro areas is a fool’s errand for all but the wealthiest. So even for people with reasonably good credit it can still be a challenge to get a decent house in a desirable location. Add poor credit to the mix and the dream of homeownership slips even further away.

Meeting a market need

It is of course easy to understand why there are mortgage lenders who cater to people with poor credit. As the lenders themselves point out they are simply meeting a demand. In fact this phenomenon can be seen all across the lending industry. There are for instance various types of personal loan products for which a credit check isn’t even necessary, and though such loans also come with very high interest rates they are sometimes the only option available to cash-strapped folks. These types of loans have come under a lot of criticism, and the financial authorities have had to rein them in somewhat, but the industry seems to be adjusting and continues to work to meet the needs of people for whom conventional loans are beyond reach.

So it is hardly surprising that mortgage lenders would pop up to target those that have experienced a “credit event” but would still like to own a house. And for people who are keen to realise the dream of homeownership the deals can be pretty tempting. But StepChange’s Peter Tutton cautions that while it is important that people who have had problems in the past are able to be normal consumers again, if someone had been bankrupt or repossessed relatively recently, “you would expect lenders to think very hard about whether their finances have fully recovered”.

If you are struggling to get on the property ladder and are considering one of these “subprime” mortgages, think before you leap. Now would be a good time to review recent history, not to mention taking a brutally honest look at your own financial history and prospects. Carefully consider whether it would be wise to take out a mortgage under these conditions, and by all means consult with a qualified financial adviser as well. The dream of owning a house is a wonderful one but can easily turn into a nightmare if you make the wrong choice. Better to defer that dream and work to get yourself in better financial shape so you will not take on more than you can handle.