Prime and Sub Prime Mortgages
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.
It always is…