Defaults in UK and US Mortgage Industry

Is the UK mortgage industry likely to experience same problems of debt default as US mortgage industry?

Defaults on American mortgages have been making headline news recently with a record number of defaults; up to 4.95%. For the sub prime market this rate of defaults has reached 13%. Some are concerned that there are similarities between the American housing market and the UK housing market and in the future the UK could experience a similar level of defaults. However it is worth pointing out that there are differences between US mortgage industry and UK.

1. The number of 100% mortgages is much lower in the UK. 100% mortgages are quite rare, especially in the bad credit or sub prime sector. In the US 50% of sub prime mortgages were 100% mortgages

2. UK mortgage dealers are generally more risk averse. Even for self-cert mortgages there is more checking of income than in the US. See dangers of sub prime mortgages.

3. House prices are not falling. In the US many now have negative equity with no possibility of Remortgaging. Some believe the UK housing market is overvalued, however it is worth remembering that supply constraints in UK the may enable house prices to keep rising. see house prices to keep rising

4. Interest rates in the US have shot up sharply. US interest rates have increased from 1% to 5.25%; this is the main reason for loan defaults in the US. Interest rates have risen by more than people expected. In the UK interest rates move much more gradually. E.g. in the last 8 months there has been 3 increases of 0.25%

5. In the UK fixed rate mortgages are more common than in the US. These give additional security against rising interest rates.

However it is worth bearing in mind that

1. UK house prices could fall. The house price to earnings ratio is at an all time high and it has made it difficult for first time owners to buy. House prices could fall

2. UK consumers have a high % of indebtedness. This makes them susceptible to any future rise in interest rates.

3. The sub prime market in the UK is likely to grow. Figures by Datamonitor show 9.1 million people of working age were refused credit by mainstream lenders during 2005. In 2010 this figure is predicted to rise to 9.4 million.



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