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Balance the borrowing

Last April, at the height of the credit squeeze, I applied for – and obtained – a mortgage. For someone who is self-employed, that’s not too shabby.

There was no reason why we should not have been offered a homeloan. I was looking to borrow less than 50 per cent of value while the sum involved was barely twice my annual pre-tax earnings. We only use one credit card and pay our debts off every month. We have no other outstanding loans. The application was submitted with my tax returns for the last three years. Unlike many other self-employed borrowers, my income was an open book so I must have ticked all the boxes expected of a prudent borrower.

The irony is that a week after the lender finally agreed the loan, the paperwork was completed and we waited to exchange on the property we were buying, one of the clients I supplied copy to shut its website and ended my freelance contract.

The sums involved were large, so large that the income multiple we were now borrowing at doubled overnight. We had a choice – we either completed on the deal or we pulled out at the last minute.

We carried through with our purchase. Journalists being resourceful tykes, I managed to replace much, although not all, of that lost income. With some careful budgeting, our mortgage is not likely to be causing us any major headaches.

Our own story – and that of thousands of borrowers in similar positions – form the real-life backdrop to the FSA’s mortgage market review, published last October.

The original review leant heavily towards doing away with so-called “liars’ mortgages”. It proposed “affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay”.

Lenders would require “verification of income” for all applications. In effect, self-certification loans would have been outlawed. The regulator was proposing a crackdown on so-called “toxic” loan combinations, such as lending high multiples of income to a borrower with a poor credit history.

Its discussion paper looked at whether new rules should “prohibit loans to borrowers who exhibit certain multiple high-risk characteristics, such as credit-impaired borrowers that are also at high loan-to-income”.

It also proposed use of affordability criteria rather than simple income multiple incomes when assessing a mortgage application, with assessments on a borrower’s ability to repay based on disposable income.

Lenders would always be responsible for making sure this was done, even when a broker is involved in the process. To avoid those with problems taking out interest-only loans, it proposed that affordability should always be assessed on a repayment basis.

There were a lot of good ideas in the MMR. The problem, unfortunately, lay in the remedies that were being proposed. Last week’s published responses to the review take on board many of the FSA’s points but also raise some criticisms of the proposals themselves.

The feedback it received shows there is almost no support – apart from someone called G Brown – for a ban on higher loan-to-value mortgages or restrictions on the amount that can be borrowed as a multiple of income.

As for self-cert mortgages, many lenders have objected to calls to check the income of all applicants. Some big lenders have argued that such checks will unfairly penalise the self-employed, who are not able to provide proof of regular income from an employer.

The banks have also argued that low-risk applications, such as from existing customers, should not have to go through the income-verification process.

I am torn both ways. Although we found it easy to obtain a loan, a better credit rating than ours would be hard to imagine. If our application had been refused, there would not have been anyone left in the country eligible for a mortgage. Even so, as our case proves, it is potentially possible for even the best applicants to become higher-risk almost overnight.

There must be scope for borrowers with slightly spottier circumstances than ours to be able to buy a house. The problem is that as soon as you permit looser guidelines, borrowers who should not under any circumstances be allowed credit will sneak through the net.

The harsh reality is that for the system to retain some measure of equilibrium, it will be necessary to restrict the availability of mortgages to some types of borrowers.

The issue is one of calibration and execution and lenders ought to focus their attention on that rather than complaining about the FSA’s decision to intervene in the market.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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