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Sub-prime mortgages are sold to people with a poor credit rating - and as lenders get more cautious, an increasing number of people will be forced to resort to them. Samantha Downes did so - and is paying the price
Millions of Britons are being left with little choice but to take out expensive and complicated home loans known as sub-prime mortgages.
Samantha Downes: was forced to take out a sub-prime home loan after missing a loan repayment


These loans, also called credit repair mortgages, are sold to people who have a poor credit record and charge a higher rate of interest because the borrower is considered a more risky bet.
With lenders tightening up their credit policies, simply missing a loan repayment may mean that a borrower is forced to take out a sub-prime mortgage. People who are divorced are often also left with no option but to opt for a sub-prime loan.



The latest figures from Datamonitor estimate that 9.1m people were refused credit by mainstream lenders in 2005 and have been forced to look elsewhere. But Moneyfacts, the comparison service, says it is a minefield for people ineligible for standard mortgages - there are more than 4,000 different sub-prime mortgage products and a variety of fixed, variable and discounted rates are available.
"These mortgages are complex and fees tend be higher, while loan-to-values [LTVs] are lower and interest rates are generally higher than those in the mainstream mortgage market," says Julia Harris, a mortgage analyst at Moneyfacts. "The products are not that difficult to understand, but knowing how to find the most suitable product can be a real challenge."
There are different levels of sub-prime mortgage. Someone who has a very bad credit rating - they may be a discharged bankrupt or have a lot of county court judgements against them - will be sold a "heavier" version.
Someone who has missed a couple of mortgage or loan payments in the past will often be sold a "near-prime" or "light" version of the mortgage.
Sub-prime mortgages can charge as much as three percentage points more than an average standard variable rate mortgage - but again it will depend on your credit rating. According to Moneyfacts, there are huge differences between sub-prime and near-prime, with Amber Home Loans charging 5.15 per cent for a two-year fixed rate for a near-prime, while Freedom Lending charges 6.73 per cent and Birmingham Midshires 7 per cent for their sub-prime loans.
The heavier the mortgage, the bigger the fee. Search on Google and you can see that some sub-prime advisers charge 2 per cent to 2.5 per cent of the loan. That could easily work out at a £3,000 - a sum that someone with debts may not be able to pay.
Experts recommend that rather than looking for the "best rate", it is important to determine first how impaired your credit rating is - whether you will qualify for a near-prime loan or face a fully fledged sub-prime mortgage. So when beginning your mortgage search, your usual searching criteria are reversed. First you need to find lender(s) that will accept your particular financial position; then you can start to look for the best deal.

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If you have a CCJ or arrears do not automatically assume you cannot get a mainstream mortgage, as some lenders will accept some "minor debt". For example, The One account will look at cases where borrowers have a CCJ of up to £1,000 and Manchester Building Society will accept two CCJs in the past year of up to £1,000 and one payment in arrears in the past year on their whole range of home loans.
Sub-prime mortgages are not to be confused with self-certification mortgages, which are aimed at the self-employed.
Self-cert mortgages, introduced around 15 years ago, have eased the burden of proof - to qualify for a home loan borrowers just need to sign a statement of earnings, not provide actual proof. The difference between traditional mortgages and self-certs is narrower than it has ever been. However, there can be some catches.
For instance, first-time buyers and new business owners may be turned away. Unless a self-employed person has been trading for at least one, usually two, years, they generally cannot just sign a statement of earnings. Typically, an accountant must confirm the turnover, profit and salary. In addition, two years' full accounts plus two years' full tax liability may be requested.
There is also a credit check, on which first-time buyers may score too low to qualify. Ironically, buyers with no credit cards stand less chance than someone with several cards because they do not have a history of being able to repay debt.
The majority of self-certified mortgage lenders demand a 25 per cent deposit; a small minority will accept a 15 per cent deposit, and an even smaller minority 10 per cent.


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