Sub-prime growth expected to continue

The sub-prime mortgage market is set to continue to grow according to the latest research from market analyst Datamonitor.

It says the UK sub-prime mortgage market experienced another strong year of growth in 2006, expanding by 28% in gross advances on the previous year to reach £24.6bn.

Datamonitor predicts that by 2011, the UK sub-prime mortgage market will reach £31.5bn, growing at a yearly compounded average rate of 4.7% compared with the mainstream market’s rate of 2.6% which would take it to £395.1bn by 2011.

But Maya Imberg, financial services analyst at Datamonitor, says that while there remains significant opportunity in the UK sub-prime mortgage market, growth is slowing.

She says an increasing number of borrowers unable to cope with debts will be the main driver of growth in the market. High consumer debt levels have become of increasing concern in recent years as low interest rates, low unemployment and the housing market have led consumers to be more willing to borrow and spend.

More consumers are now struggling to cope with meeting their financial commitments. Imberg says high levels of consumer debt, coupled with a more difficult economic environment, will drive the sub-prime mortgage market forward over the next five years. With more people defaulting or meeting payments late, more consumers will fall into the sub-prime population. Moreover, with interest rates at their highest level for six years, an increasing number of consumers with high levels of debt will find it difficult to meet all debt repayments.

High consumer indebtedness in an environment of rising interest rates could be dangerous for lenders, says the report, particularly as lenders have been taking on more risk in the past few years. This has been a result of not only increasing competition, but also of lenders becoming more comfortable with their own risk models, shown in the form of higher loan to values, higher income multiples, and the combination of a number of other risk elements.

“Despite the argument that they have sophisticated underwriting models in place, UK sub-prime lenders should take the US sub-prime mortgage crisis as a warning and ensure they are not over-exposing themselves to highly risky loans,” Imberg adds.