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Quasimodo's Hump

Poorest Could See Mortgage Payments Shoot Up 60%

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Miles Brignall

Friday September 28, 2007

Guardian Unlimited

Some of Britain's poorest homeowners could see their mortgage costs rise by as much as 60% over coming months as the "credit crunch" feeds through to consumers, a new report has claimed.

The respected credit ratings agency Standard & Poor's today warned British mortgage holders who are soon to come off fixed rate mortgages to expect a "payment shock" - particularly if they have a poor credit history, and fall into the so-called sub-prime group.

"Borrowers who took out two-year fixed rate mortgages from late 2005 are facing one of the largest payment shocks witnessed since the 1990s, even if they are able to refinance," it said.

The problems are expected to hit sub-prime borrowers hardest because the mortgage companies that provide those loans have always been much more reliant on the money markets. As they are forced to pay more, their borrower may find that loans offered two years ago are no longer available, or are prohibitively expensive. Those with perfect credit histories will be less affected, but may still see rates rise, if the market turmoil persists.

The Council of Mortgage Lenders (CML) has calculated that around 2m fixed rate mortgages – around 17% of the total UK market – will be ending before the end of 2008.

Anyone seeking to renew their borrowings will have to do at "significantly higher" rates, the report warned.

Homeowners were already feeling the heat prior to the credit crunch that was responsible for the near collapse of Northern Rock. The Bank of England increased rates five times since August last year.

S&P's report found that the recent turmoil in credit markets has tighten credit, making wholesale funding costs increase at a higher pace than the base interest rates.

The London interbank borrowing rate (Libor) - what banks charge for lending money to each other - has shot up and the funding cost of residential mortgage-backed securities have now reached nearly 8%, it said.

The report suggests that if the credit crunch continues, sub-prime borrowers could easily see their mortgage costs rise by 26% - which would add an average of £167 to month payments on a £85,000 loan.

In the worst case scenario - if the market worsened even further – the report concluded that borrowers with the worst credit histories, who took out cheaper, interest only mortgages could see their mortgage payments rise by as much as 60% - a rate that would undoubtedly force many into substantial arrears.

A spokeswoman for CML insisted the payment shock impact will be "manageable" for most borrowers, although she conceded its effects could be considerable for the 5% of mortgage applicants who are considered sub-prime.

"Some lenders are putting in place arrangements to ensure that borrowers are alerted early to the likelihood of the increase in payments, as well as ways of helping those in difficulty, such as arrears counselling," she said.


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