Rates on the rise for subprime mortgage borrowers

LONDON (Reuters) - UK subprime mortgage borrowers are facing a sharp rise in rates as credit market turbulence adds to pressure on funding costs, lenders and brokers said on Friday, reviving fears of increased arrears and repossessions.

Many lenders in Britain's "adverse credit" sector depend on the wholesale market to fund mortgages -- through either portfolio sales or securitisations -- but recent turmoil has dried up liquidity there, pushing up the cost of borrowing.

Subprime lender Kensington raised rates for its core adverse range by 0.55 percentage points last week, while Northern Rock NRK.L, which originates subprime mortgages on behalf of Lehman Brothers, will next week raise rates for future borrowers by as much as 1.25 percentage points.

GMAC-RFC, the UK's largest subprime lender, has also sharply raised rates, particularly for the more adverse end of the market, brokers said on Friday.

"Until either the securitisation market comes back or there are other sources of funding that will allow lenders to offer mortgages at a competitive rate, they will have to tone down the volumes quite sharply," Ray Boulger, senior technical manager at mortgage broker John Charcol said.

Boulger said lenders like mortgage bank HBOS's HBOS.L BM Solutions, which uses deposits to fund loans, are also likely to lift rates, though they will come under less pressure to do so and will be well-placed to increase volumes.

"There will be quite a dramatic change in the percentage of business written by balance sheet lenders, compared with lenders who are wholesale funded," he said.

Northern Rock, a prime lender which originates subprime and self-certified mortgages for U.S. investment bank Lehman Brothers LEH.N, said on Friday its increased rate was a reflection of rising prices across the market.

"This is purely in the subprime sector and does not spread to our prime range," a Northern Rock spokesman said.