Let&#39s move to affordability as the self-cert criterion

From Neil Calver

Barely a week goes by without some sort of mis-selling scandal rearing its ugly head. This time it seems to be turn of self-certification mortgages.

So are they a licence to print money? Of course not. One possible way to dispel allegations of fraud and obtaining monies by deception would be for lenders to abolish the standard income multiple calculation when assessing this type of loan. Affordability should be the measure and a client income and expenditure analysis should be conducted, particularly when applying for a self-certification mortgage.

Factors should be built in to take into account of cash emergencies and interest rate rises but ultimately a figure would be arrived at that the client has committed to as being affordable to cover the repayments. It would then be a simple matter of a reverse calculation to establish the desired loan.

One of the experts who commented on The Money Programme stated it was affordable for a household to commit 25% of the available disposable net income to meet the mortgage repayment. It became unaffordable should the mortgage payment rise to 50% of net disposable income.

Here are some possible scenarios:

The Browns: enjoy socialising at weekends, yearly holidays abroad, maintain a high credit card balance.

The Whites: their home is their pride and joy. Willing to forego an extravagant lifestyle and would not be unduly worried should mortgage repayments rise to 50% of net income.

The Greens: one partner has no earnings and their two children are at primary school.

Mr Smith: has no partner or children.

If all the above enjoyed identical incomes and applied to the same lender, based on income multiples all would qualify for the same size of mortgage loan. In the case of the Browns some lenders are prepared to disregard credit card balances. More importantly – who would be most able to meet their commitments?

I imagine the income and expenditure analysis will become mandatory for all mortgage applications and to answer my own question regarding self-certification of income, this will surely be replaced by self-certification of agreed affordable monthly repayment.

Neil Calver

Director

The Mortgage Guild Ltd

Braintree

Essex