Mortgages  

Self-cert mortgages

Self-cert mortgages

launch of a new lender in January quickly demonstrated the sheer pent-up demand for self-certification mortgages in the UK. While lenders effectively stopped offering such mortgages in 2008, the new lender, Selfcert.co.uk, apparently based in the Czech Republic to avoid FCA regulation and using the Electronic Commerce Directive to operate in the UK, suspended sales after its website was crashed by more than 4,000 borrowers enquiring about its products in its first two days.

Self-cert deals were dubbed “liar loans” by some because their main feature was that borrowers had only to declare their income, but not to prove it. The suggestion is that some borrowers effectively lied about their income in order to obtain bigger mortgages. As a consequence, self-cert mortgages had a higher default rate than other mortgages.

So why is there such demand? “We don’t know the circumstances surrounding the individuals who made enquiries,” says Brian Murphy, head of lending at the Mortgage Advice Bureau. “But there are clearly groups of people failing to access finance because of lenders’ stance on income verification.”

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Self employment on the rise

Mr Murphy acknowledges that the number of self-employed people in the UK has expanded, but also says they are relatively well catered for in the mortgage market provided they can verify their income. The problem is with those with inconsistent income or unable to provide sufficient evidence of their income to satisfy lenders under MMR rules. Self-cert filled a gap for those unable to evidence their ability to service their debt. But many of those who contacted the new lender are existing self-cert borrowers unable to refinance because of the new rules.

In a statement, Selfcert.co.uk said that it has suspended lending for three months while it deals with the avalanche of enquiries. It explained that it has funds for only 200 average sized mortgages, so many people are likely to be disappointed. It also expressed sympathy for the enquirers, having ascertained that many are trapped in expensive standard variable rates (SVRs) due to their inability to meet lenders’ strict new criteria.

As Mr Murphy points out, while many of these enquirers are unable to prove their income, they are also likely to have been paying their mortgages consistently for the past eight or more years with no arrears or late payments. Yet the market precludes them from changing their borrowing as they will not meet current criteria. “Clearly a more pragmatic approach is needed for borrowers in these circumstances,” he says.

That is where the transitional arrangements designed to cover so-called “mortgage prisoners” were supposed to kick in. This was a set of arrangements put in place by the FCA to help “mortgage prisoners”. Under these arrangements, provided borrowers have a good payment record and are not looking to increase their borrowing, lenders can dispense with the new affordability rules to allow them to move on to better deals. However, the suggestion is that many lenders are choosing not to implement such arrangements, leaving borrowers trapped on more expensive SVR deals.

FCA warns consumers

While it is unlikely all the enquirers meet the criteria for transitional arrangements, many probably do, but can see no way out except to apply to a lender that is not even based in the UK. In response, the FCA issued a statement designed to spell out the risks consumers are taking in applying for such a mortgage. It pointed out that borrowers taking out a mortgage from a lender not based in the UK lose their consumer protection rights, including the right to complain to the Financial Ombudsman Service (Fos) and any protections that may apply should the borrower face payment difficulties.