Could a self-certified mortgage lead to financial ruin?

With 'credit crunch' rapidly becoming an everyday phrase, the Citizen’s Advice Bureaux has conducted a survey to establish the true extent of the debt problem for the UK and the results are quite startling. They have concluded that many people drowning in debt or on the verge of slipping under have got there due to a combination of bad advice, irresponsible lending practices and fraud.

Traditionally UK lenders would only consider giving loans to those who had a stable income, a good credit rating, and who could afford it. But from midway through 2007, lending criteria become more relaxed, meaning that people who would have previously been turned down for credit were advanced significant mortgages and loans.

But the CAB report has found that the introduction of mortgage products such as self-certification and high equity, non-status loans made it much easier for those who could not prove their income, and those who had a significant percentage of equity in their homes to get loans. Significantly, many self-certification loans were arranged through mortgage brokers, and the CAB has suggested that they should more accurately be called ‘liar loans’.

The CAB found that many self-certification loans were granted to people who were not required to provide proof of income, had “little or no financial acumen” and also possessed poor credit records. Many of the applicants when interviewed said that brokers made no attempt to stress the serious consequences of not keeping up repayments on their mortgages.

The CAB report was compiled using 1,200 case studies recorded at the UK agency’s 360 advice centres. The organisation gave advice to 57,000 people who had mortgage and secured loans arrears during 2006/07, representing an increase of 11% on the previous year. Furthermore, the research estimates that as many as 770,000 Britons missed at least one secured loan or mortgage payments during the same period.

According to the CAB, the problem firmly stems from the fact that sub-prime lenders offered loans at much higher interest rates to people who couldn’t really afford them. The CAB also concluded that those borrowers had been rejected by the majority of high street banks and building societies, forcing them down the sub-prime route. Many borrowers were unable to keep up repayments on unrealistic loans and the CAB also believes that unfortunately many more are waiting in the wing, ready to come forward in 2008.

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