Home Loans: Bad Credit Home Loans, Low Doc Home Loans

The US sub-prime market - what is it all about?

 Australians are slowly beginning to feel the affects of the US sub-prime mortgage crisis. Many Australian lenders have raised their variable interest rate outside of the RBA increases, with the most recent of these being the CBA, ANZ and the NAB. So what actually happened?

Sub-prime in the US is what Australia knows as low-doc loans. The US Home market had been in steady decline for some time and homeowners with overstretched mortgage obligations began to feel the pinch. A sudden spate of defaults caused some fatalities amongst sub-prime lenders and credit default in insurance spiked.

But how does that affect us on the other side of the world? Basically (in the US) a lot of people could not afford the loans that they were given. They were just on the edge of financial viability when they received the loan – it all went pear-shaped after the US central bank hiked rates four times in 2006

Sub-prime mortgages account for 10% of total US mortgage market. The Reserve Bank of Australia has determined that sub-prime accounts for only 4% of Australian mortgage-backed securities. The default rate for US sub-prime is currently 10%. The default rate for Australian low-doc loans is 1%.

Financial analysis company Cannex had confirmed in late October that aside from RAMS there were at least 31 other non-bank lenders in Australia that offered similar low-documentation loans. These include Aussie Home Loans, Wizard, Virgin Money, Pepper and Better Choice Home Loans, Webdeal Home Loans.

Low-documentation loans suited the self-employed, who make up about 12 per cent of working Australians. The loans are appropriate for this group as they are not required to supply income verification to gain approval. Certainly the current interest rate situation in Australia will cause hardship to a large number of families who were ‘just able to afford’ their home loans before the recent rate hikes. Those who will manage to stay focused on maintaining control over their mortgage repayments will come out winners.

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