Following a report from the BBC's Money Programme, the FSA (Financial Services Authority) conducted its own investigation into self-certification mortgages and the practices undertaken by mortgage intermediaries when helping individuals apply for such loans. The original BBC investigation was triggered by information from the public that some brokers were falsifying information on self-cert mortgage applications and therefore committing mortgage fraud.
Self-certification mortgages are designed for people with irregular incomes who cannot verify their full incomes with documentary evidence. This type of home loan product is popular with the self-employed and employed people working on commission and bonus structures that cannot accurately predict their future earnings and cannot provide solid proof of past earnings.
The FSA has concluded from its investigation into self-certification mortgages that there are adequate controls in place from lenders to ensure that this type of home loan product is being sold to customers in a proper manner. The BBC programme claimed that some property buyers were being encouraged by brokers to inflate their income on applications for self-certification mortgages in order to secure the mortgage size they require for the property they wish to buy.
It is not normally a requirement for applicants to provide documentary evidence of their incomes when applying for self-certification mortgages. Such products are targeted at people who may not be able to provide such evidence, such as the self-employed. The FSA concluded that the controls in place from lenders are appropriate for this business and has issued statements to this effect to chief executives of the UK's largest mortgage lenders. The authority also concluded that the proportion of customers of self-certification mortgages who encountered difficulties with their mortgage repayments was not significantly higher than people with standard mortgages. Self-certification mortgages comprise about 5% of the total mortgage market and a small proportion of total repossessions.
From this evidence the FSA suggested that people were not using self-cert mortgages to borrow more than they could afford en masse, contradicting the report from the BBC. The FSA did warn, however, that it is a criminal offence to lie on a mortgage application. This includes situations in which there may be no immediate requirement to verify income. Just because a lender does not ask for verification of income it does not mean an applicant can put whatever income level they choose on their application form. This can still be regarded as mortgage fraud.
Borrowers should therefore not exaggerate their incomes on applications for self-certification mortgages despite the fact that they will not be required to provide documentary evidence of their income. Borrowers should think carefully before applying for self-certification mortgages to ensure they don't borrow more than they can afford to repay. Borrowers should seek advice from an independent mortgage adviser in order to ensure that self-certification mortgages are right for them.
All borrowers should keep in mind that no matter what mortgage product they secure they will be liable to meet the monthly repayments. Exaggerating income levels could quickly lead to a situation in which the monthly repayments become unmanageable if interest rates were to rise.
