Sub-Prime Problem To Affect UK Mortgages By Michael Sterios At Isnare.com Ezine Articles

The sub-prime mortgage crises has claimed several scalps in the US but has so far failed to heavily affect the rest of the world. It is safe to say, however, that mortgage industry analysts are waiting with bated breath to see whether the UK financial markets will be adversely affected.

The US sub-prime loan crises has evolved from loose lending criteria leading to a situation in which millions of borrowers with poor credit histories and volatile employment situations have been granted mortgages and loans.

During times of low interest rates, such borrowers are able to keep up on their loan payments. However, once interest rates begin to increase, the cost of maintaining the mortgages can skyrocket, leaving many households unable to cope.

This will eventually lead to loan defaults and repossessions amongst the general public. Simultaneously, in the world of the financial markets, loan bundles worth hundreds of millions of dollars become less profitable and therefore less attractive to own.

In addition to a tightening the lending criteria of mortgages and loans offered to the general public, the cost of borrowing money on the interbank market for financial institutions also becomes more expensive.

It is this part of the crises that may spill over to the UK. Financial institutions lend and borrow money on the interbank market with little regard to geographical location. Ever since the problem with sub-prime mortgages emerged in the US, the interest rate charged on the interbank market has increased.

This means that UK financial institutions now must pay more interest to borrow money. The fear is that this increase in costs may be passed on to the UK public by way of increasing the interest rates attached to mortgages and loans.

To counter this, many UK lending institutions that also offer deposit accounts are offering customers higher interest rates on their savings. This move is designed to encourage people to invest their money in savings accounts, which will effectively give the institutions access to the cash.

This may give UK financial institutions access to large sums of money at cheaper rates than they can get by borrowing money on the interbank market. The savings fund may then be used to help the institutions offer mortgages and loans to their customers without increasing interest rates.

However UK lenders that have been lending money to consumers that was borrowed on the interbank market rather than money from deposit accounts are vulnerable. This has been demonstrated by the Northern Rock crisis. Northern Rock’s financial issues have been brought about by the same type of irresponsible lending practices that have forced US lenders to declare bankruptcy.

Unlike in the US, the UK Government has rescued Northern Rock. While many argue that taxpayers should not be responsible for rescuing private companies that are poorly managed, the Government has taken the view that by rescuing the lender the public will not lose confidence in the economy.

A loss of confidence in the UK financial system on a mass scale may result in reduced spending and a mob mentality to sell stocks on the share market. The ultimate effect of this could be devastating to the economy.

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