The UK’s financial regulator, the Financial Services Authority, has been stating for some time that it wants stringent restrictions placed on certain types of lending by the UK’s banks, and one of the mortgage loan types that has been targeted by the FSA is the self certification mortgage. With these mortgages, which are granted to those that are self employed, there are concerns because the income that the borrower earns is difficult to predict.

These mortgages are also sometimes referred to as ‘liar loans’ and this is because officials believe that because the income of the borrower is more difficult to determine the borrower is able to over-exaggerate earnings in order to boost the amount that they borrow. However, the concerns of the FSA include the higher risk of these borrowers over-burdening themselves and ending up with a mortgage loan that they cannot possibly afford to repay. This is why the regulator has been seeking a ban on these loans.

However, according to recent reports the banking industry is seeking to fight against a ban on these mortgages, with some bank officials claiming that it penalises self employed people and make it impossible for them to get a mortgage in order to buy a property. Whilst the FSA has received some praise for its overhaul of standard in the banking sector this is a proposal that has been met with mixed reactions and could have a profound negative impact on those that are self employed.

One industry report stated: “Respondents were concerned that the proposal would impact negatively on the self employed, trigger an increased use of fraudulent income documentation and increase lenders administrative costs. Some respondents also believed the market has already adjusted by withdrawing self-certified products and, therefore, regulation is no longer required.”

The government has been accused of continuing to show a lack of understanding of the current mortgage market in the UK following outlines that were announced by the Chancellor of the Exchequer, Alistair Darling, in his recent pre-election budget speech.

In the budget Darling announced a number of measures, including suspension of stamp duty for first time buyers on properties up to £250,000, and an improved income verification system for use by lenders, which would be established by HM Revenue & Customs.

However, a number of industry officials have hit out at the proposals stating that they show a clear and continued lack of understanding of the mortgage market in the UK by the government. One analyst from the company John Charcol slated the approach on stamp duty, stating that it was unfair because it gave first time buyers an unfair advantage over other buyers, and that it should have been extended to all buyers not just first time buyers.

He said: “It would have been much more sensible to increase it for everybody. What will now happen is that first-time buyers will actually have an advantage over non-first-time buyers for properties between £125,000 to £250,000. A lot of people might say that is fine but I don’t think it is as simple as that. What about second-time buyers who will be in a worse position?”

Another industry official said that the HMRC income verification check was a flawed idea, because the income details that the Revenue Service kept were around nine months out of date. This would mean that someone that applied for a mortgage and had been recently made redundant could still end up getting a positive verification. He also said that the checks and verifications on income would take far too long.

Since interest rates started going up in the UK between August 2006 and July 2007 there have been grave concerns in relation to the millions of people who were on cheap fixed rate mortgages and were due to come off them, as they would be left to try and manage rocketing repayments with interest rates so much higher than when they took out their fixed rate mortgage. Thankfully, some enjoyed a little saving grace through the fact that between December 2007 and April of this year interest rates fell three times, although they were still higher than when many of these homeowners took out their cheap fixed rate deals. Read the rest of this entry