29 November 2008

According to Michael Thommes, who writes about self-certification mortgages in mortgage strategy, self-certification mortgages were introduced during 1980 s, to help buyers from different backgrounds to purchase properties for the first time. In the mid 1980s, many council tenants were encouraged by the government to purchase their properties with massive discounts. However, self certification mortgages got popular as everyone, including banks, mortgage brokers and also the public started to get greedy for more income and capital growth. Banks are now able to make a profit, people can buy bigger houses and brokers can receive higher commission, all works very well until the bubble bursts. Then no one wants to take the blame. The application process for self-cert mortgages usually require filling mortgage application forms, which should be in line with lenders' lending criteria. If for example, lenders criteria requires 3,5 times income, borrowers should have an income of at least £60,000 if they are looking to borrow £200,000. Banks call it "responsible lending", which really covers them for potential claims, if clients are unable to meet their mortgage payments. If a client would put an application on an annual income of £10,000, court probably will argue that £200,000 loan should not have been allowed in the first place. Of course, banks have to cover themselves; they need to be sure that they will recover their money in case the borrower will default. However, borrowers are faced with the dilemma of lying about their income or putting a true figure only to have their self cert mortgage application refused. In his opinion, income declarations should have not been allowed in the first place. Borrowers should have been made to review KFI and then sign that they understand and accept the terms of specific self certified mortgage . He believes that the idea of self-declaration of income is ridiculous, because if people are receiving income from several sources or doing jobs for cash, which they don't include on their tax returns, then they are lying to Inland Revenue. Speed of completion is not an excuse to apply for self certified mortgages. He believes that the majority of borrowers applying for a self certified mortgage do it as they simply don't earn enough income. Many self-employed customers apply for a self certified mortgage, because they haven't been in the business long enough to have accounts. There are lenders which will offer self cert mortgages to these customers at slightly higher rates as long as they were in the business for 3 months These lenders normally charge a little bit higher interest rates for self certified mortgages reflecting the perceived increased risk. Now, employed people who are looking for their mortgage self certification, surely if the borrower is receiving a salary, he should be able to prove it with payslips. If the customer receives commission or overtime payments, they should be shown on salary slips, if he is receiving tips, they should be disclosed to on their tax return. If employed people are looking for a self cert mortgage, they are more likely than not earning enough, they do it to fulfil lenders criteria to be able to get what they want. Mortgage self certification is even more problematic in the sub-prime market. One of the reasons borrowers will be sub-prime as that they have had credit problems previously. How can we be sure that they will be able to make payments, possibly for a larger loan, with higher interest rates? Despite that, not those long ago, until the credit crunch affected us, there were banks offering self-cert mortgages up to 85% of property value on a self-certification basis to people with areas and CCJs. If both parties are happy, they should be able to do it. The banks are aware what type of borrowers they are lending money to and the customers are fully aware of their responsibility to make repayments in line with the offer terms. Not only everyone should ensure that people disclose accurate information on their application form, lenders should only lend and the customers should only borrow if they feel they can service the mortgage.