FSA confirms the death of 'self-cert'

Like every other borrower in Britain, freelancers and the self-employed will in future have to prove their income and take an "affordability test" if they want to take out a mortgage.

In an announcement that confirms the death of self-certification mortgages, the Financial Services Authority said nobody should be exempt from having to prove their ability to repay.

Freelancers and the self-employed, whose income streams can be irregular or diverse, may therefore "have to wait longer before applying for a mortgage," the FSA conceded.

The onus will be on these borrowers to "gather a track record of [their] income" - probably over a 3-year period, a process that the regulator believes "everyone" is able to achieve.

If they can't, they will be required to hand the lender their bank statements, an accountants' confirmation of income, and/or tax returns or "other evidence provided by HMRC."

Seeming to justify the death of non-income verified mortgages - known as 'self-cert' and dubbed 'liar's loans', the FSA pointed to fresh data showing extraordinarily high levels of arrears among the self-employed.

The watchdog's figures show that, mainly due to start-ups failing soon after their birth, 30 per cent of all borrowers with bad credit are self-employed, compared with 15 per cent of borrowers with clean credit history.

They also confirm that non-income evidenced home loans grew beyond the niche customers they were intended for, as they account for almost half of all mortgages taken out since 2007.

Lesley Titcomb, FSA director responsible for the mortgage market, said: "There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.

"While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers."

Under the proposals, which are open to consultation until November, freelancers and the self-employed stand to receive smaller or restricted loans if they have a bad credit rating.

The thinking is that this should result in the freelance or self-employed borrower having cash spare if they fall behind with repayments, which are on average fives times higher for those with bad credit.

The FSA reflected on consigning 'self-cert' mortgages to history: "While non-income verified mortgages were originally aimed at niche audiences, such as the self-employed or the lowest risk applicants, they gradually became more widely used.

"....While stringent criteria may have originally been applied to such applications, for example in terms of loan-to-values, these criteria were relaxed over time."

When dealing with would-be borrowers, the regulator said it expected lenders to verify the income they would take into account, whatever its source, by obtaining "reliable evidence" to confirm its credibility.

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