Credit Crunch And Self-certification Mortgages

With the credit crunch forcing lenders to evaluate their loan books and reassess the types of products they offer it would appear sensible to anticipate the demise of the self-certification mortgage. However the market for self-certs remains buoyant as lenders have not tightened the reigns as much as expected.

Mortgage lenders have reported record losses on their loan book due to high default rates on non-standard products. These products typically include mortgages that have been issued to borrowers with bad credit or borrowers who may not be able to prove their incomes.

Such borrowers represent a high risk to mortgage lenders. This is normally reflected by higher interest rates and fees being charged to hedge against the increased risk. In the wake of the rise in interest rates over the past few years many borrowers of non-standard mortgage products have been forced into a situation in which their monthly repayment amounts is unaffordable.

The overall affect has been an increase in loan defaults which normally prompts borrowers to tighten their lending criteria. While mortgage products that were targeted towards borrowers with bad credit have been disappearing, self-certification mortgages remain widely available.

Borrowers who apply for self-certification mortgages must declare their income to the lender but are not required to provide evidence of earnings. This type of mortgage product is particularly useful to self-employed workers and employees with uneven earnings levels, such as those who receive commission payments instead of a salary.

Mortgage lenders were expected to pull self-certification mortgages from the market as the credit crunch began to take effect, however this has not been the case. One explanation for this surprise move is that self-certification mortgages may not be as risky to lenders as first thought.

Lenders will only remove products from their loan books that represent an unacceptable risk or that are contributing to their losses. The wide availability of self-certs suggests that lenders have assessed that they are still a profitable product and should continue to be offered to borrowers.

This is good news for self-certification mortgages and provides an indication that they should remain largely unaffected by the credit crunch.