Subprime Mortgage – Loan Access for Bad Credit
Overview
Following the credit crunch of 2008, many banking institutions in South Africa and across the world altered their lending policies to align with changing consumer trends.
They also introduced various measures to ensure that their business interests as financial institutions were protected. One measure that was introduced was that of more stringent lending criteria for individuals and businesses looking to get a loan.
As a result, fewer consumers were approved for mortgage loans. Subprime mortgages have become increasingly popular in recent years.
What is a subprime mortgage?
A subprime mortgage is a loan granted to individuals with poor credit histories. Interest is charged at a higher rate than a conventional mortgage. This type of loan is often granted to individuals who have no credit history whatsoever.
Studies have shown that such loans often have a higher risk of default than loans to prime borrowers.
They may also require a higher down payment and they may have higher interest rates as well as greater closing costs. Some subprime mortgages have a 6 month to a 2 year pre-payment penalty.
Interest rates can vary and are partially based on a variety of risk-based factors, such as:
- Credit score
- Size of down payment
- Number of late payments listed on your credit report
- Types of delinquencies
Types of Subprime mortgages:
- Interest-only Loans
- Option ARM Loans
- Negative Amortization Loans
- Balloon Loans
- No-money- down Loans
What are the benefits of getting a subprime mortgage?
If you have a low credit score you can get access to finance
The loan can be tailored to suit your own needs
Interest rates are personalised
What are the disadvantages of getting a subprime mortgage?
Higher interest rates may be charged
Understanding how the process works can be quite a complex process
