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3 September 2007
The financial news has been filled with doom and gloom about the sub-prime mortgage sector situation in the United States, which seems to be having global repercussions.
As expected by many experts, the UK has not been spared from the effects of the credit crunch, with a number of lenders stating that they will either be taking sub-prime mortgage products off the market, even if only on a temporary basis, and others planning to scrap their products and leave the sub-prime sector altogether.
One lender, Northern Rock, has announced that despite rumours it is not planning to leave the sub-prime mortgage sector. However, the lender has announced that it will be hiking up interest rates on sub-prime mortgages because of the new level of risk involved.
According to recent report the cost of home loans for those with poor credit could rise by up to 1.25% next week, which will add a huge amount on the typical monthly repayment on these loans.
The lender only entered the sub-prime market earlier this year, working in conjunction with SPML, a subsidiary of Lehman Brothers. Northern Rock will not have to worry about the risk of defaults from sub-prime customers, as the risk remains with SPML even though Northern Rock receives a fee for selling one of these sub-prime mortgages to a customer.
Sub-prime mortgages are targeted at those with poor credit who would find it difficult to get a mortgage from a traditional lender, and are known for the high rates of interest charged compared to standard mortgages.
With the decision to raise these rates even further, many bad credit consumers will now find it impossible to get a mortgage that they can afford.
A Northern Rock official confirmed that there were no plans to move away from the sub-prime sector at present, and speaking of the imminent interest rate hikes on sub-prime loans stated: "This is a price increase reflecting the competitive nature of the market."
However, some industry professional believe that this is just a ruse that will result in the lender taking on less business from sub-prime customers, thus reducing the risks involved.
One broker stated: "It is obvious that if you are way down the list in terms of rates you will not get the same level of business Virtually turning the tap off may suit Northern Rock for the time being, until the market settles down. To an extent it has been imposed on them. There has been a definite rise in costs, but it probably will suit them - it gives them some breathing space."
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