What’s the Difference Between a Prime and a Sub-Prime Mortgage?
In the financial crash of 2007/2008 the term sub prime mortgage became part of the national lexicon but what exactly is a sub prime mortgage and should you take one out to fund your home purchase or remortgage?
What is a Prime Mortgage?
Mortgages each have different interest rates and set up costs (mortgage arrangement fees) and the way each bank assesses what rate to charge for each product is by assessing the risk of the loan. The riskier the loan the higher the interest rate and associated fees.
At one end of the mortgage risk scale are prime mortgages, which represent the lowest risk to the lender. The applicant or applicants will have a perfect or near perfect credit history and they will have a large deposit of at least 15% but ideally more. High street banks specialise in these types of mortgage and if you tick these boxes you will be able to get an interest rate of around 1.5% (at time of writing September 2019).
What is a Sub Prime Mortgage?
But if you don’t tick those boxes then you will be looking at a sub prime mortgage in order to fund your Oxford mortgage needs. But that doesn’t necessarily mean you are going to be paying 20% interest per annum or be the cause of the next financial melt down. In fact, the sub prime mortgage market is extremely competitive and so there are some pretty good mortgage deals to be had if you meet the various lenders’ mortgage lending criteria.
People with less than perfect credit scores and/or smaller deposits of 5 or 10% are going to be shopping in the sub prime mortgage market. But there isn’t a one size fits all way of working out what kind of rate these mortgages will have as each mortgage will be aimed at a certain level of risk with an interest rate to match.
Types of Sub Prime Mortgage
So someone with a few missed payments on their credit file and a deposit of 10% might be able to get a rate around 2-25% per year, a person with defaults, CCJ’s and a 5 % deposit might still be able to get a mortgage but its interest rate would be significantly higher around 4 or even 5%.
But what this means is there really is a mortgage for everyone. There are even mortgages aimed at people who have been recently bankrupt. As long as they have been discharged for over a year there are lenders out there who would be happy of the business.
Is it Risky to Take a Sub Prime Mortgage?
Taking a mortgage is risky full stop! You are probably going to be borrowing more money than you ever have before or will again. So it is not a decision that should be taken lightly but there is no more risk to a borrower when taking a sub prime mortgage rather than a prime.
The monthly payments will likely be higher but the affordability assessment before you take out a mortgage should mean a sub prime borrower cannot borrow more than they can afford. As long as their circumstances don’t change the borrower should be able to afford their payments each month just like a prime borrower.
What if I Can’t Even Get a Sub Prime Mortgage?
If your credit history is so bad that you cannot even get a sub prime mortgage, or perhaps you can but are not too keen on the higher rate, then it is essential to understand what is affecting the lenders’ decision.
Get a credit report from Checkmyfile.com who hold information from the 3 main credit referencing agencies and then see what you can do about making it look better.
If you would like any help with a mortgage or anything else to do with mortgages or property, then get in touch and I will gladly give you some free advice. And head over to my about me page to learn a bit more about me and how I can help.