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A consumer&#39s view

It is not much fun being a mortgage lender. First, the BBC&#39s Money Programme has a go at them over self-certification mortgages.

The programme claimed that some intermediaries are encouraging borrowers to lie about their income and inflate their earnings, in order to borrow more. The implication was that the lenders had been conniving in the situation or simply did not know what was going on.

More recently, the lenders have been hauled over the coals for advancing higher multiples than the standard three-and-a-half to four times, income – this at a time when they are also getting stick for not being flexible enough, particularly with first-time buyers struggling to afford a home of their own.

The FSA has looked into the first claim of irresponsible self-cert lending and the lenders have been given a more or less clean bill of health.

Luckily, it is fairly easy to check. If the lenders had been guilty of irresponsible lending to self-cert borrowers, there would doubtless be a nasty situation with arrears and defaults and this is definitely not the case.

The FSA pointed out in its letter to the lenders that self-certification lending accounts for a small proportion of overall mortgage balances (about 6 per cent). The number of customers who encounter difficulties with repayments is currently not significantly higher than those with standard mortgages. This suggests that borrowers have not been taking on bigger mortgages than their income would justify.

Writing in the Council of Mortgage Lenders&#39 news-letter Bernard Clarke, of the CML, points out that although homebuyers might be tempted to inflate their incomes, there is no evidence that these less than truthful borrowers are actually successful in obtaining a loan. He maintains that most are weeded out before the application is granted by the stringent underwriting process.

He is probably right but even if he isn&#39t it doesn&#39t matter because clearly those who inflate their incomes in order to borrow more, can afford the repayments.

We know this, because they are not getting into arrears. It is, of course, conceivable that borrowers are not actually inflating their incomes at all but are simply lying to the Inland Revenue.

But what of the other criticism – that the lenders are being irresponsible in lending some homebuyers more than the standard three-and-a-half times income? This is nonsense too.

You do not have to be a mathematical wizard to work out that if lenders thought it prudent to allow homebuyers to borrow three-and-a-half times income when the mortgage rate stood at 15.4 per cent, as they did in 1990, and the borrowers did not all get into arrears or default, then it is obvious that some can cope with higher-multiple loans when the mortgage rate is only 5 per cent or thereabouts.

Moreover, we now have a sophisticated mortgage market that will allow the borrowers to lock themselves into repayments that they can afford by fixing the rate.

Rather than criticising the lenders, perhaps they should be applauded for recognising that a simple multiple of earnings is too inflexible a formula for working out what a potential borrower can afford.

I have been arguing for this for years.

People&#39s circumstances and priorities or motivations vary enormously. Three-and-a-half times income may be sensible for a family with a non-working wife and the expense of bringing up two children, a single person or couple beyond child-rearing age can clearly afford to spend a bigger proportion of their income on mortgage repayments.

Nobody asks a parent whether they can afford £20,000 a year to educate a child privately. Many of them cannot but still manage to find the money from somewhere.

It is time that we all stopped trying to nanny everybody and accept that the vast majority of individuals are responsible people who know what they are doing when it comes to taking on a mortgage and running their lives. Thank goodness that the lenders recognise this and have, quite rightly, largely chosen to ignore these criticisms.


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