What Is A Sub Prime Mortgage

A prime mortgage is a mortgage that is offered at the lender’s standard variable rate, which is usually 2% higher than the Bank of England’s base rate. Those borrowers who have excellent credit ratings and a good employment history can get prime mortgages. Borrowers who have spotty credit ratings or a lack of good employment history will need to get sub prime mortgages. Sub prime mortgages are less favourable to the borrower than prime mortgages, but they do allow the borrower to get a home even with a bad credit rating.

What Are Sub Prime Mortgages?

Sub prime mortgages, which are sometimes called bad credit mortgages, are the loans offered to people with poor credit ratings. Because a poor credit rating equals a higher likelihood of defaulting on a loan in many lenders’ eyes, these loans have higher interest rates than prime mortgages.

The sub prime mortgage world has varying levels. The worse your credit score is, the more below prime your mortgage will be. This means that an extremely low credit rating will cause you to pay extremely high interest rates. Also, a bankruptcy or individual voluntary agreement in your past will almost certain doom you to shopping for sub prime mortgages.

The US Sub Prime Mortgage Crisis

The sub prime mortgage industry has been in the news quite a bit in recent days due to the American sub prime mortgage crisis. Early in the 2000s, American lenders decided to allow more sub prime applicants to be accepted for mortgages than they had in the past. The lenders and mortgage brokers made money off of these borrowers, so they were happy.

Many of these loans came with special introductory interest rates that allowed the borrower to afford them at the beginning, but when these special rates wore off, the borrowers could no longer afford the monthly payments. As the lenders foreclosed on these properties, they found that many were worth far less than was owed on the mortgage. This has caused many lenders to suffer, and as a result those with poor credit ratings are finding it more difficult to get sub prime mortgages. The individuals in the foreclosed homes were left with nothing, and now suffered from even lower credit ratings.

The American sub prime mortgage crisis shows British borrowers that they need to carefully consider whether or not they can afford to get a mortgage. Remember, the cost of a mortgage may change if it has an introductory rate or a variable rate. Be sure to count the cost before signing the mortgage agreement!