Your Money: The loan rangers riding for a fall

Melanie Bien
Sunday 02 November 2003 01:00

If the Bank of England does raise the base rate on Thursday, it will make life that bit harder for those who have overstretched themselves on their mortgage, personal loans and credit card debt.

Those likely to be hit particularly hard are homeowners who exaggerated their income when taking out a self-certification mortgage. Some homebuyers have been encouraged by unscrupulous mortgage consultants to inflate their income several times to get a bigger mortgage.

Self-certification mortgages do not require proof of income: you declare how much you earn, unlike regular home loans where the income multiple is strictly monitored by the lender. On most mortgages, borrowers are allowed three times their income.

But with self-certification mortgages the temptation to over-commit can be strong. Used properly, these products are handy if you have sufficient income but can't prove it using payslips or accounts. You may have a low income, for example, but earn high commission or rely on bonuses to boost your salary. Or you may only have been self-employed for a short period and be unable to produce three years' worth of accounts.

The broker who sells you your mortgage is supposed to satisfy himself that you earn what you say you do, although this isn't always happening. Even if interest rates increase only slightly, many people will find it difficult to meet their repayments.

The revelations are likely to prompt the City regulator, the Financial Services Authority, clamping down on self-certification loans. This would be a shame if it discourages genuine applicants who would struggle to get a "regular" mortgage. But more checks and balances are needed, and those selling mortgages need to be more responsible in what they encourage borrowers to do. That is why it is important to use an independent broker - no matter what type of mortgage you opt for.

It is not in the interests of an independent broker with a good reputation to recommend you overstretch yourself. But a salesperson tied to a particular mortgage lender and with an eye on his commission may view the situation differently.

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