A
prime, mainstream or standard mortgage is one
for which a borrower would need to have a good credit
rating and certain circumstances to be eligible.
If you are in regular employment and have always repaid your debts
on time – for example, personal loan or credit card payments –
and do not have any county court judgments against your name then
you should be eligible for a prime rate mortgage and have access
to the best mortgage deals on the market.
If you have a poor
credit history due to defaulting on loan or credit card payments
or even just paying a phone or utility bill late, then you will
be classified as a “sub-prime” borrower.
Sub-prime mortgages or bad
credit mortgages come with higher rates than prime mortgage
deals as there is a higher risk of the borrower defaulting.
The
more "suspect" your past credit record, the more sub-prime
you will be considered to be by the mortgage lenders, and the
higher the rate you will pay.
If
you have ever had an individual voluntary agreement (IVA) or been
declared bankrupt then a sub-prime mortgage will be your only
option if you want to be a homeowner.
Once
you have proved you can manage your finances better and have made
payments on time, there may be the option to migrate to a prime
or “near-prime” mortgage deal.
The sub prime mortgage crisis
This
emerged in the USA during 2006 and 2007 after mortgage lenders
relaxed previously stringent lending rules so that "sub prime"
applicants were accepted for mortgage loans.
Everyone
made money from the resulting commission payments. The mortgage
brokers, the directors and shareholders of the mortgage lenders.
The
problems started when some of the unfortunate borrowers could
not meet their regular monthly mortgage payments - usually after
the initial special "headline
interest rates" had come to an end.
The
reason this affected the economy was that these sub prime loans
were effectively worthless becuse they had been secured on properties
which were either unsellable or worth much less than had been
supposed.
The
problem was the loans had been accepted as "secured"
and mixed up into various clever financial lending instruments
- that came with many fancy sounding names - which the banks traded
amongst themselves.
Unfortunately neither the lending instruments nor the banks were
quite as clever as had been assumed. It became very difficult
for the banks to know what their position was. How many cookies
did they really have in their cookie jar? They weren't sure. This
rattled confidence in the dominant capitalist financial system
all over the world
It
was OK though because of the few amazingly impressive suits who
ran the banks, only a few got fired. And their pay offs usually
amounted to tens if not hundreds of millions of dollars.
The
poor borrowers who lost their homes by the thousand? Ah... that's
another story.
Never
trust a person in a suit, exuding "trust me, I'm a suit",
offering something which seems too good to be true.
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