Average interest rates on mortgages aimed at borrowers with poor credit ratings have increased by only 0.24 per cent in the past six months, according to MoneyExpert.com analysis*.
The independent comparison website says the average rate has risen from 6.33 per cent in July 2006 to 6.57 per cent today, despite the fact that during the same period the Bank of England base rate has risen by 0.75 per cent.
However the company warns that fees payable on so-called ‘sub prime’ mortgages have risen dramatically. The average fee has increased by 13.5 per cent from £813 to £923 and the number of sub-prime mortgages with a fee of over £1,000 has rocketed by over 46 per cent during the same period.
And specialist lenders prepared to offer a fee-free sub prime mortgage are vanishing fast. Since the recent base rate increases began in August 2006, MoneyExpert.com research shows the number of mortgages without a fee that are available to people with adverse credit has decreased by a massive 81 per cent from 71 to only 13.
One in five mortgage brokers plan to increase the amount of sub prime mortgages they offer over the next 12 months**, but MoneyExpert.com says that customers need to watch out for high fees as appetite for sub prime mortgages increases.
Sean Gardner, Chief Executive of MoneyExpert.com, said: "Many people rely on sub prime mortgages, from the self-employed to people who have very poor credit ratings. Although it’s good news that many lenders haven’t passed on the base rate rises on sub prime mortgages, customers have to be wary on fees.
"The average fee payable has risen by over £100 which is bad enough. But it is startling to hear that the number of sub prime mortgages with a £1,000 fee or greater has rocketed by 46 per cent.
"If you don’t have a perfect credit rating and you are considering a sub prime mortgage, make sure you search the market high and low as there are thousands of products to choose from. High arrangement fees can skew the effective rate of interest you’ll get on your mortgage, so don’t pay the price for poor research."
MoneyExpert analysis shows there are currently over 2,500 different sub prime mortgages on the market, and around 1,690 will charge applicants six per cent or higher to borrow money. There are still around 70 products available with a rate below the current base rate of 5.25 per cent.
Rates on sub prime mortgages can go as high as 11 per cent for people with ‘heavy adverse’ credit. There are hundreds of fixed rate deals on the market at levels that could rival some standard mortgages rates, but borrowers are warned that once the offer period expires they could be hit with very large monthly repayments as the rate increases.
People thinking of applying for a sub prime mortgage are warned that there are no guarantees that their application will be accepted. MoneyExpert warns that each individual’s circumstances are taken into consideration and in many cases applicants will have to accept a much higher rate of interest than advertised.
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* MoneyExpert.com analysis of the Defaqto Aequos Database, 23.01.07
** Research by GE Money Home Lending