The return of sub-prime mortgages – a warning from history or a cause for celebration?


It doesn’t take a long memory to remember the heady days pre-credit crunch when “self-certification” and “sub-prime” mortgages were being marketed to all and sundry regardless of the borrower’s ability to repay the debt. These mortgages took the brunt of the blame for the subsequent crash and recession and understandably disappeared from the banking landscape. From 2010 onwards property prices have risen, however, only those with squeaky clean payment records have been considered for new loans with tightened mortgage affordability requirements creating an additional hurdle for prospective borrowers.

Many may view this as a welcome return to sanity and responsible lending. However, this has presented a problem for anyone with an imperfect credit rating who will be forced to sell their home should they need to release any equity.

As a firm of Licenced Insolvency Practitioners, Gibson Hewitt frequently assist individuals with large amounts of unsecured debt, often by negotiating an Individual Voluntary Arrangement, (“IVA”), with their creditors. The terms of that IVA are not prescribed so long as they are commercially acceptable to both the debtor and their creditors.

Pre 2008 a very simple and workable IVA proposal was based on the debtor obtaining a (sub-prime) remortgage to release a chunk of equity. That equity was then divided pro-rata between the creditors in full and final settlement of their claims. Such IVA proposals were appealing from all the perspective of all parties because they offered a fast return and were largely infallible.

Post 2008, a debtor in the same scenario was given the option of either selling their home or making monthly payments to their creditors. The former was generally unappealing to the debtor and schemes based on the latter often failed as creditors typically made the payment terms too onerous.

As our nation’s banks have returned to health post-bailout, we have now seen the cautious re-appearance of sub-prime mortgages on the landscape. The current crop of sub-prime mortgages are a world away from those available pre-crash as the Loan To Value, (“LTV”) ratios are now generally limited to 70% and borrowers must now prove that they can afford the repayments.

This appears to be a successful balance between responsible lending and the provision of credit to those who actually need it.

More importantly, for homeowners in need of an IVA, the return of sub-prime mortgages means they now have a IVA mechanism which gives them some certainty of success without having to sell the family home.

If you or your client is in need of advice concerning their debts, please contact Lynn Gibson or Robert Hewitt on 01932 336149 to arrange a free consultation.

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