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SUB PRIME SHOCK HITS UK

by The Anglo American | October 1, 2007 at 12:48 am

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2008 will see open season on interest rates for 80,000 homeowners in the UK. Borrowers face a 11.25% mortgage rate if they stay with their existing lender, once their intorductory rate ends next year. Many will have no choice. As the credit crunch tightens, refinancing may prove impossible for people with less than perfect credit. But even if Prime-borrowers refinance at the most competitive rates, they will still see their monthly payments rise by 18%. But most people will face between 32% - 60% increases in their monthly payments. The S&P ratings agency outlines this scenario in The Financial Times.

.....a borrower who took out an interest-only mortgage in October 2005 might have paid an interest rate of 7 per cent, or about £500 a month for an £85,000 mortgage.

However, even if this borrower were now able to get a mortgage deal, the best rate available would be about 8.25 per cent, which would push up monthly payments by 18 per cent to £589.

S&P believes more realistically that borrowers will only be able to get rates of 9.25 per cent, which in this case would push up monthly payments by 32 per cent to £661. However, in the worst case scenario, a borrower unable to get another deal would have to stay with the existing lender and pay a rate of 11.25 per cent, pushing up monthly payments by 60 per cent to £800.

Many Prime borrowers face further difficulties since they have used their UK homes as collateral to finance their purchase of second or even third home abroad. Savills, a British real-estate company, estimates that there is ₤52bn of investment in British-owned homes outside Britain. With property markets softening in Europe, or going into decline, there are few easy options to the borrower.

Professional debt advice groups help individuals in the UK negotiate with their lenders in what is known as Individual Voluntary Arrangements [IVA]. They are beginning to see an increasing number of high earners approach them for advice.

Next year, we're going see more people in these brackets with debt problems," predicts James Falla, of debt consultancy Thomas Charles. "The middle- to higher-income brackets have seen property prices rise and they've pushed themselves to get there.

....we'll see a trend towards more higher-income people getting into trouble - the trigger will be property

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liamssoft

at 04:01 on October 1st, 2007

I hope for the country's sake that these estimated interest rates are wrong. To lift rates to this high level when house prices are at an all time high would bring devastation to thousands of homeowners and completely stop new first time buyers of making their first purchase.
A recession would then follow.

The Anglo American

at 04:51 on October 1st, 2007

The Financial Times shows a graph in the broadsheet {not on line alas} that 2008 is the peak year for the unwinding of the Introductory fixed rate mortgages. Any reduction in interest rates {before the end of the year?} will be balanced against inflationary pressures, which are more acute in the UK than the US {sorry – you probably know all this!}. Sadly, over 7% of the unwinding of these mortgages takes place in the first quarter of 2008 and a further 6% in the second quarter and that's just the sub-prime customers! It gives the BOE little room manoeuvre - fingers crossed.