A new report by the respected Standard and Poor credit ratings agency has warned a jump in monthly repayment costs of up to 26% can be expected by those homeowners who have a poor credit history when they come to re-mortgage.
Currently the agency expects huge “payment shocks” for around 80,000 people who have a history of bad credit and are due to come out of their fixed rate deals between now and the end of 2008.
It puts the predicted increases down to a number of factors, mainly recent rises in interest rates combined with the current turmoil in global money markets, resulting in many lenders passing on higher borrowing costs to their customers.
More worryingly it also added that with the recent slump in the American housing market, caused by problems in the sub prime sector, many lenders have had to take a serious look at their lending criteria resulting in some borrowers with a poor history not being able to get a re-mortgage at all.
While this is most likely to affect current borrowers the effects of the changes are likely to impact on new customers as well, especially with lenders who specialise in giving mortgages to those with the poorest credit history. This means that where they have traditionally been happy to accept a 5% deposit they will now be looking for at least 10%.
While a payment increase of 26% is bad enough, for those who are unable to refinance the only option open to them is to revert to the standard variable rate of their lender. This could lead to monthly repayment increases of as much 60%.
The recent turmoil in global money markets has led to a dramatic increase in the rates at which financial institutions lend money to each other. These increased costs have in turn been passed on to borrowers, with most “sub prime” lenders increasing rates significantly on their loans. This combined with the five interest rate rises since August last year means that “anyone who took out a fixed rate mortgage deal in 2005 is likely to face a payment shock not seen since the early nineties”.
In real terms this means that the average borrower, about to come off a fixed rate deal, is likely to see an increase of around £167 (26%) on their monthly repayments of an £85,000 interest only loan.
While this increase may be absorbed by some, there is a real worry that for those people already feeling the effects of the current “credit crunch” this will be one financial burden too far resulting in yet more people facing the real prospect of losing their home.
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