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.”
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.
But what is the FCA doing about lenders’ failure to apply the arrangements? A spokeswoman says that the FCA is seeing some firms increasingly use the arrangements, but points out that they are “enabling” rather than obligatory. Consequently, it is not in the FCA’s “remit to dictate” on how firms apply the arrangements.
However, the issue is being considered as part of the FCA’s investigation into competition in the mortgage market launched in October 2015. An outline of responses and whether it will take any further action as a result are due to be published during the first quarter of this year.
Mr Murphy suggests that a groundswell of public opinion may be needed to get the FCA to act on this issue so that borrowers who are able to service their existing mortgages are allowed to refinance.
Several building societies, including Ipswich, Melton Mowbray and National Counties, have sought to stand in the gap for mortgage prisoners, offering to help where they have been refused transitional arrangements by their own lenders. However, they are few and far between and do not have a large lending capacity.
As Selfcert.co.uk itself says in a statement on its website, “While we aim to help as many people as we can, we have to be honest in that, unless other lenders follow us, this site won’t make any kind of dent in the number of people who want to get on the property ladder and can’t because of a lack of official paperwork.”
