Escape the sub-prime trap while there's time

Escape the sub-prime trap while there's time

Fixed rates on sub-prime mortgages have shot up over the last few weeks due to the knock-on effects of a rise in mortgage defaults in the American sub-prime market. The crisis has rocked stock exchanges around the world and the fallout is likely to continue to be felt for some months. Predictably, this has been bad news for new borrowers in the sub-prime market - last week one of the biggest such lenders in the British market, Northern Rock, put up the rates on its sub-prime fixed rate deals by up to 1.25 per cent, following similar moves by a raft of other lenders. It also withdrew all its sub-prime tracker products.

However, it's not only new sub-prime borrowers who face problems. Reversion rates - the variable interest rates that short-term deals such as two-year fixes move to when they come to an end (similar to the standard variable rates on a mainstream mortgage) have also gone up with some lenders. For example, the reversion rate on lender GMAC's 'light' adverse deal - for borrowers with relatively small credit problems - was 7.85 per cent but has now risen to 8.35 per cent.

And even where reversion rates have stayed the same, they are high compared with the standard mortgage market. Sub-prime specialist Kensington charges the highest at 9.5 per.....continued below

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'The first thing any borrower coming to the end of a sub-prime deal should do is to see whether they could get a mainstream deal,' says Melanie Bien, director at mortgage brokers Savills. 'If you have been consistent in paying your mortgage off each month over a couple of years then you should be able to.'

Someone who took out a two-year fixed-rate sub-prime mortgage two years ago is likely to be paying an interest rate of about 6 per cent on that loan. Remortgaging to a mainstream deal, even after the recent interest rate rises, should still be slightly cheaper.

'A lot of people are saying fixes [in the mainstream mortgage market] are expensive at the moment and borrowers would be better off on a tracker,' says James Cotton of mortgage brokers London & Country. 'But this doesn't matter if you want the certainty of fixed mortgage repayments each month - which many borrowers trying to get back on track after a sub-prime mortgage will.'

Examples of some good fixed-rate deals in the mainstream market include a two-year mortgage from Britannia at 5.49 per cent with a £999 fee, a three-year fix with Stroud & Swindon at 5.7 per cent with a £799 fee as well as free legal work and valuation, and a five-year fix with the Newcastle building society at 5.82 per cent with a £499 fee.