Debt levels drive sub-prime mortgage market
A rampant housing market had made consumers more willing to borrow.
Sub-prime mortgage lending is set to continue to grow as increasing numbers of Britons fail to keep up with their debts, a report said today.
The news comes after the Council of Mortgage Lenders yesterday revealed that housing affordability had reached an all-time low, with the average first-time buyer needing to borrow a record 3.37 times their income to buy a home.
Market analyst, Datamonitor, said the sub-prime market, which lends to people who would be turned down by mainstream banks or have defaulted on repayments in the past, increased by 28% during 2006, to a total of £24.6bn.
Sub-prime mortgages tend to be offered by specialist lenders and come with higher interest rates than mainstream deals.
Datamonitor said the market looked set to continue expanding at nearly twice the rate of the traditional mortgage market as high levels of consumer debt, coupled with a more difficult economic environment, boosted demand for its loans.
It added that it expected the sub-prime market to be worth £31.5bn by 2011, after growing at an annual rate of nearly 5%.
The report's author, Maya Imberg, said: "There remains significant opportunity in the UK sub-prime mortgage market, however, growth is slowing."
She said healthy economic growth, low interest rates, low unemployment and a rampant housing market had made consumers more willing to borrow and spend.
"However, more consumers are unable to cope with meeting their financial commitments," she said. "High levels of consumer debt coupled with more difficult economic conditions will drive the sub-prime mortgage market forward over the next five years. With more defaulting or meeting payments late, more consumers will fall into the sub-prime population."
But the report also warned that the UK sub-prime market was itself at risk from people defaulting. It said high levels of consumer indebtedness in an environment of rising interest rates could be dangerous for lenders, particularly as many had been taking more risks during the past few years as they became more comfortable with their own risk models and were offered higher income multiples.
Imberg said: "With the recent US sub-prime mortgage crisis, in which a significant number of borrowers have defaulted on their loans, the discussion has become a hot topic again.
"Despite the argument that they have sophisticated underwriting models in place, UK sub-prime lenders should take the US sub-prime mortgage crisis as a warning and ensure they are not over-exposing themselves to highly-risky loans."
Sub-prime criticism
Datamonitor said that in the current economic climate it was essential lenders ensured customers were not borrowing more than they could afford. The Financial Services Authority recently criticised the sub-prime sector for failing to assess properly whether its customers could afford their home loans.
It found that none of the 11 firms it looked at were adequately following responsible lending policies. It has started enforcement action against five mortgage broking firms, which it has so far refused to name.
Source: guardian.co.uk
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