Self worth

23 July 2010 8:00 am

I have heard the FSA is going to ban self-cert mortgages. I am self employed and can have an irregular income. I am currently a homeowner with a self-cert mortgage but want to move house. What are my options?

We currently live in a world where all major financial institutions (and a lot of minor ones too) are essentially being underwritten by taxpayers but it is not entirely clear where corporate self-interest ends and the broader public interest begins.

What we do know is that since at least the start of 2009, the FSA no longer assumes bankers know best.

In this new world where banks owe billions to the Government, we have been hearing some of the implications for how much core capital banks need to hold and their overall amount of debt. In short, this is the need to restore balance sheets back to health by being far more cautious when lending and making more money when they do.

If banks cannot borrow as much as before and have to hold higher capital reserves against riskier forms of borrowing, that can and surely will affect the quantity and quality of mortgages they offer. Of course, the decline in the housing market over the last two years would have done a lot of that already.

But the FSA does not think that is the whole solution because it does nothing to protect Joe Public from getting into serious financial difficulties through high-risk loans.

The FSA is not entirely happy with the non-bank specialist lenders which offered these loans in the boom years as it believes there were fewer controls in place to protect the borrower than were available from the mainstream lenders - which, it should be pointed out, were also offering self-certification loans.

It has decided to single out self-certification mortgages for elimination - and all other products which do not ostensibly require proof of income, such as fast track.

Coming back to the original question, it is quite true that the regulator’s actions have made it much harder for some self-employed people and others with irregular incomes to get a mortgage but it all comes back to the same basic logic. If we think it was too easy to get a loan in the boom years, then the solution has to involve making it harder, at least for some people. The challenge is to make sure it is harder for the right group of people.

Unfortunately, this ultimately means someone ho originally took out a mortgage on a self-cert basis (accounting for over a million borrowers at last count) will now be left with the stark reality that they are now being unnecessarily excluded from access to finance and will face much higher costs as they are forced to remain on a standard variable rate. A rate which will certainly be rising in the medium term once bank base rates begin the inevitable increase from the current 0.5 per cent level.

Finally, therefore, assuming there is sufficient equity in the transaction, and by that I would suggest 25 per cent or more, the only option for an existing self-cert borrower is to rely on the forbearance of their current lender to provide a new product on a new purchase based on the history of the current mortgage.

Again, this is a very slim option as the lender is bound to take a responsible approach to a new loan deal as regulation requires and be expected to undertake strict affordability tests linked to proof of income - something unfortunately a self-employed person with irregular income is bound to fail.
It is not a promising outlook, I am afraid, and we should all be hoping that minds are can be changed during the four-month consultation period.

Michael White is chief executive of Email Mortgages

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