A loan that is extended to a borrower with an impaired credit history who would not ordinarily be eligible for sanction of a mortgage facility is called a sub-prime mortgage. The word ‘sub-prime’ means of lower or below par quality and is a reference to the quality of the loan and not to the interest rate.
Types of Borrowers
- Such Borrowers are categorized as high risk and, therefore, the interest rate levied for such loans is above the prime lending rate that is offered to the best customers. Above average credit risk perception results in above average interest rates;
- Borrowers who have low credit scores may either be refused loans or offered sub-prime mortgages.
Adjustable Rate Mortgage
The rate of interest is initially fixed but is later converted to an index linked floating rate. The floating rate is usually near usurious and most Borrowers realize it too late.
Interest Only Mortgage
This Borrower is required to pay only the interest for the initial years with the principal outstanding remaining unchanged. Borrowers expect personal circumstances to change for the better by the time instalments of principal become due for payment
Telescopic Mortgage Loans
Characterised by low initial payments with a bullet payback after that period
