FSA Consultantion Paper - Self Cert Mortgages

Author: Jeni Browne Posted on: 13 July 2010

The FSA have today released their consultation paper which offers commentary and areas for review in relation to 'Responsible Lending'.  The hot potato, 'self-cert mortgages' and 'fast track' mortgages obviously came under the hammer.

Research has shown that  self cert, sub prime mortgages at 80% loan to value and above, have an arrears level of 42%.  Furthermore, 46% of households have either no money or a shortfall of money once they had paid their mortgage and household costs.  When we start to look at this information, it is understandable that the FSA are wanting to ensure that borrowers only take on debt that they can reasonably afford. 

Self cert mortgages were originally introduced for those people whose basic salary was not reflective of what shows on their p60.  For example, a car salesman would get a relatively low basic wage, but commission to the tune of  100-200% of this.  As lenders tend to take a percentage of commission as it is not guaranteed, self cert was a way to allow someone to borrow against their overall income and not be restricted as to how this was structured.  The problem here is that firstly, car salesman will have seen a much reduced level of earnings over the last couple of years as their commissions were hit by the economic situation (hence why lenders only take a % of non guaranteed income), but also because some people took this facility as carte blanche to inflate their earnings above and beyond what they earn.

I think the key is not that everyone will have to prove income, but how the lenders will interpret that.  In the consultation paper, there is no guidance as to what income is acceptable and how it should be attributed, but instead just that income should be proved.  Therefore, the ball will now fall into the lenders courts to show a intelligent and risk based approach to how they interpret and apply different income types when assessing affordability.