Concerns for growth in sub-prime mortgage lending

Datamonitor, the independent market analyst, has published research showing that the sub-prime mortgage sector in the UK is likely to expand faster than the mainstream sector.

Sub-prime mortgages are taken out by people who have poor credit histories and are therefore at greater risk of defaulting.

Datamonitor believes that by 2011, the UK market for sub-prime mortgages will have grown in value to £31.5bn, compared with £24.6bn in 2006, because increasing numbers of people will, in the future, have poor credit histories.

The growth predicted is nearly double that for mainstream mortgages over the next four years but will still leave the sub-prime market accounting for less than 10% of the total mortgage market by 2011.

Some analysts are of the opinion that growth in sub-prime lending could lead to difficulties in the housing market and the wider UK economy.

As sub-prime borrowers are more likely to default, they could in time cause financial difficulties for lenders.

Sector experts are looking to recent events in the US, where problems in the sub-prime lending market have caused to a slowdown in the housing market.

Datamonitor is urging UK sub-prime lenders to study the situation in the US and amend their lending policies to avert a similar crisis in the UK.

In addition, the Financial Services Authority (FSA) has recently undertaken a review of the UK sub-prime market from which it found examples of consumers being offered mortgages they may not be able to afford.

The FSA has expressed deep concerns about the findings of the review and is currently taking action against five lenders.

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