Jim White is managing director of Jim White's Mortgage Solutions Although interest rates have seen a dramatic fall in recent years, we now seem now to be in a relatively stable interest rate environment as compared with the 1970s and 1980s. Of course interest rates can and will rise again but we are unlikely to witness the large fluctuations of those two decades.
If, as seems likely, the UK eventually joins the euro then this will further underpin the argument for a low interest rate environment for the foreseeable future.
If you accept this argument then there is a case for suggesting that income multiples are out of sync with the current interest rate cycle and that they should be increased. After all, if 3 x earnings was acceptable when the base rate was between 7% and 9% why should 4 x earnings not be acceptable when the range is between 3% to 5%?
If this principle were to be acceptable to lenders then a number of the key problems associated with self-certification mortgages could be avoided. In principle there is nothing wrong with self-cert mortgages that could not be addressed by lenders insisting on more stringent checks on applicants' ability to service their mortgage payments.
At the same time it would be prudent to build in a wealth check to ensure that an applicant could service potentially higher interest payments on their mortgage. A longer fixed rate term for self-cert mortgages would also be helpful in this context as this would enable borrowers to be certain of their commitments for, say, a five-year term albeit at a higher rate.
The latest controversy is a challenge that lenders and brokers must meet together to ensure that self-cert mortgage products and the advice given by brokers are both of the highest quality.
The mortgage industry must now consult and agree on new standards. The alternatives are clear and unpalatable – and those who are not willing to agree need only look to the pensions and endowments crisis to see how they might learn their lesson the hard way.
Peter Brodnicki is chief executive of Mortgage Advice Bureau
The key to the future of self-certification is responsible lending and a revision of the sales process. Brokers must establish affordability through a detailed analysis of expenditure and income. Technically this allows advisers to stretch salary multiples and they are thus responsible for reassuring the lender that a borrower's income is sufficient. This implies that advisers must share responsibility for the underwriting of the loan with the lender.
It is important for both lenders and intermediaries to understand the profile and needs of the self-cert borrower. From a lender perspective, underwriting processes must be suitably robust to ensure minimal risk but flexible enough to accommodate the nuances particular to this sector, most notably irregular or varied sources of income. Similarly, intermediaries need to understand how to assess the circumstances of each applicant and demonstrate in-depth knowledge of the certification requirements and criteria set by lenders.
The Mortgage Advice Bureau is trialling an affordability declaration. Although lenders don't demand it, we believe this is an important document for advisers to have on file.
The declaration provides borrowers with information on the likely impact of changing interest rates and the effects of taking on additional financial commitments such as new loans. This is a potential solution to the issues raised by the FSA in CP186 questioning the suitability of traditional self-certification mortgages for employed borrowers.
Payment protection is often crucial with self-cert mortgages. The self-employed or those in contract work are vulnerable to peaks and troughs in their income and have no back-up if they are unable to work due to illness or accident. First-time buyers are also vulnerable because they are likely to have high LTVs and no savings to fall back on should they suddenly suffer loss of income.
Last month's mis-selling revelations highlight the need for advisers who are fully aware of the relevant issues and regulations.