Page last updated at 12:06 GMT, Monday, 20 August 2007 13:06 UK

UK sub-prime market tightens up

Mortgage application form
Getting a sub-prime mortgage has become much harder

Would-be home owners with bad credit histories are finding it increasingly hard to get mortgages, as lenders tighten their loan conditions.

At least seven UK sub-prime lenders have raised their interest rates or withdrawn their mortgage ranges.

It follows the liquidity crunch in the financial markets caused by mortgage defaults in the US as the housing market slowed dramatically.

One UK lender - Victoria Mortgages - withdrew its range of loans last week.

"We are not offering any mortgages at the moment," said managing director Alex Forrester.

"We hope to do it at the end of the month," he said.

Bad debts

Sub-prime lenders specialise in offering mortgages to people with poor credit ratings

According to the magazine Money Marketing, other such lenders which have also raised their borrowing rates, or withdrawn their deals totally before deciding on a new range, are GMAC-RFC, Unity Homeloans, Infinity Mortgages, Mortgages plc, Preferred, and DB Mortgages, a subsidiary of the giant Deutsche bank.

Up to now it has been possible, providing you are not bankrupt, to get a mortgage, however bad your credit it
Ray Boulger

Infinity has now decided to postpone the relaunch of its mortgage range, which should have taken place on 20 August.

"The borrowers who will notice most are those with the most adverse credit," said Ray Boulger of mortgage brokers John Charcol.

So-called sub-prime mortgages currently account for about 10% of all home loans in the UK.

Typically they involve people with a history of bad debts, or uncertain and variable incomes, obtaining mortgages but at higher rates of interest than normal.

But by charging more, or tightening their lending conditions, some lenders will, for the time being, not do any more business.

"Up to now it has been possible, providing you are not bankrupt, to get a mortgage, however bad your credit is," said Mr Boulger.

Higher costs

All lenders who specialise in lending to these sorts of customers are regulated by the Financial Services Authority.

The Council of Mortgage Lenders (CML) recently published an analysis of this section of the mortgage market and came to the conclusion that sub-prime lending in the UK had been far less risky than its counterpart in the US.

But these customers are, for the time being at least, going to have to pay more for their loans, assuming they can get a loan at all.

"The cost will go up - those lenders who have announced increased rates over the last week are putting their rates up by between 0.5% and 2.5%," said Mr Boulger.

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