Homeowners to face sub-prime shock

Thousands of UK homeowners could face increases in mortgage repayments as lenders look to reclassify them as bad risk borrowers.

Many homeowners could find themselves fall into the sub-prime category when remortgaging as banks and building societies tighten up on their lending criteria, warns mortgage broker Moneygate.

"The mortgage market is changing by the day. As lenders look to tighten their terms a person could be labelled a bad credit risk and sub-prime just because of a small financial error in their past," said Dennis Reed, director of Moneygate.

"The knock-on effect of that re-classification is very significant – a mainstream mortgage payer being shunted into the sub-prime market could face crippling interest charges of up to 2.5 per cent higher than average."

The Bank of England's credit conditions survey shows lenders expect standard mortgage borrowers to face no increased difficulties in securing loans in light of the credit crunch.

However, those in the sub-prime sector could face higher costs for borrowing and tightening of lending criteria.

A recent study by ratings agency Standard & Poor's reveals sub-prime borrowers could face average repayment increases of 26 per cent, with some having to pay up to 60 per cent more when remortgaging – as rising interest rates and turmoil in the financial markets push up rates.

"People applying for mortgages will need to be much more accurate about the information they give. For example, a county court judgement that in the past was not considered crucial, could now mean the difference of being reclassified as sub-prime when they come to re-mortgage," said Mr Reed.

The UK now has an estimated 230,000 to 300,000 sub-prime borrowers.