Crystal Umbrella

The Financial Services Authority have confirmed the end of the self-cert mortgage, confirming that self-employed individuals will be subject to an “affordability test” prior to being accepted for a mortgage.

The FSA said that everyone must be able to prove their ability to repay a mortgage. They conceded that those contractors and freelancers whose income can be irregular may “have to wait longer before applying for a mortgage.” They also confirmed that it will be the individual’s responsibility to “gather a track record of [their] income”. It is likely that each individual will be expected to prove their income over the previous three years.

The FSA pointed to the level of arrears amongst self-employed individuals and freelancers as the reason for the end of these non-income evidenced mortgages. The FSA director for the mortgage market, Lesley Titcomb: “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.”

The new proposals are currently under consultation, with this period due to end in November. Other changes include self-employed individuals and contractors being restricted in their borrowing if they have a poor credit rating.

The FSA concluded: “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…stringent criteria may have originally been applied to such applications, for example in terms of loan-to-values, these criteria were relaxed over time.”

The Financial Services Authority have unveiled plans to ban self-certification mortgages which is sure to have a major impact on contractors who wish to buy houses. In recent years, when lending was at an all time high, both the employed and the self-employed were able to gain self-cert mortgages, meaning that no proof of income was required. Predictably this mean that many people were less than honest and subsequently fell into difficulty with their mortgage when the recession hit. This earned self-cert mortgages the unfortunate nickname ‘liar’s loans’.

The FSA commented: “The best way to deter individuals from applying for, and lenders from accepting applications is to require income verification in every case.”

On the subject of how this would affect contractors, the FSA stated: “We can think of no reason why the self-employed or contract workers would not be able to verify their income. An income flow that is ‘non-regular’ and fluctuating is not equivalent to, nor does it imply, one that is ‘non-verifiable’. Even income…received only once or twice a year should be capable of verification.”

The FSA is planning “further analysis” on how contractors would prove their income. It is thought they would be required to produce their tax returns or priced contracts. However, it is unlikely that an accountant’s certificate will provide sufficient proof on its own.

Backing up their planned reforms, the FSA said: “The FSA needs to ensure that firms only lend to people who can afford to pay the money back. The reforms the we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.”

Contractor UK spoke to an IFA working primarily with self-employed who concluded: “Compulsory verification of a borrower’s income, which will effectively kill the self-cert mortgage market, …comes as no surprise.”