The Guardian reports that sub-prime mortgages, which were widely blamed for causing the financial crisis, have begun to re-emerge as a new lender unveiled loans for borrowers with poor credit histories.
Magellan Homeloans will offer mortgages of up to £400,000 to people who have had county court judgments, individual voluntary arrangements or even bankruptcy orders against their names.
However, borrowers will be charged interest rates starting at 8.55% compared to current “best buy” rates of as little as 1.5% on conventional loans. Magellan is the first lender to return to what the mortgage industry calls “heavy adverse” lending, which was common before the credit crunch but disappeared completely by 2008.
Source: The Guardian
We say: Sub-prime mortgages were not, in themselves, the cause of the credit crunch. The credit crunch was more the fault of greedy banks buying blocks of sub-prime debts from the US banks who initially lent the money without really understanding what they were buying. Any mortgage with a high loan-to-value ratio is risky for the bank whereas the lender faces a much lower risk profile making a low loan-to-value mortgage available to borrowers, even those with poor credit histories. There is a big difference between the reckless lending that precipitated the credit crunch and prudent lending with full security in place and demonstrable serviceability of the debt even to those with weaker credit histories.
As long as the likes of Magellan Homeloans make prudent lending decisions then there’s nothing wrong with this and the move is to be welcomed. “Sub-prime loans” are not themselves dirty words.
