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Last Updated: Wednesday, 11 July 2007, 15:33 GMT 16:33 UK
Buyers turn to bad credit lenders
Terraced houses
Sub-prime lenders give loans to people with a bad credit history
Watch: Gillian on 'sub-prime'
As Prime Minister Gordon Brown vows to make housing more affordable for all, an increasing number of borrowers are turning to sub-prime lenders.

These give loans to people who do not qualify for market interest rates because of problems with their credit history.

The non-traditional market is set to continue to expand at nearly twice the rate of the mainstream mortgage market, according to analysts Datamonitor.

High levels of debt are helping to fuel the alternative market, which grew by 28% to a total of 24.6bn in 2006.

Housing affordability has also reached an all-time low with first-time buyers now borrowing over three times their income, says The Council of Mortgage Lenders (CML).

Mortages of 95% +
January 07 - 9%
June 07 - 19%

There are concerns over spiralling debt as more borrowers are taking out 95%+ mortgages and falling into arrears with their payments.

Buyers who manage to get onto the property ladder are paying out 19.1% of their income on mortgage interest payments, says the CML.

No. of people in arrears
2006 - 36,0000 per month
2007 - 77,000 per month
Source: Spicerheart Financial Services

This figure does not include the last two interest rate hikes, which would have made finances even tighter for many borrowers.

Some people feel that sub-prime lenders are exploiting people who might have got into financial difficulties in the past.

One lender says that customers rejected by the high street have nowhere to turn to, and in this instance, sub-prime loans represent good value for money.

"We are just a mortgage broker but we're using companies like GE Capital and Kensington, and the amounts of money that they are charging is as little as 2% over base. Our loans at the moment are between 7.5 and 7.9% - and I would suggest that's maybe not as high as people think it is," Matthew Cheatham from One Advice told Working Lunch.

Vicious circle graphic
Gillian explans why it is difficult to get out of sub-prime borrowing

However, the programme has found sub-prime loan rates of 10.05% for a fixed rate mortgage with Mortgages Plc and 12.1% variable rate with Pink. Both require a 995 set up fee.

A fifth of the US property market is sub-prime, which has resulted in a crisis through borrowers defaulting on their loans.

Despite the sub-prime market being four times smaller in the UK, lenders are now taking notice of what is happening on the other side of the pond, hoping to avoid the same potential pitfalls.

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