Self certification of income is perhaps one of the most misunderstood aspects of all where mortgages are concerned. Self certification does not mean that no income has to be stated, and neither does it mean that any income which is stated will be ignored; these were features of mortgage schemes known as “non status” mortgages, and have been unavailable for a number of years. Self certification is a process whereby the lender will assess the income an applicant stated on the application form in the normal way, but will not ask for proof of the amount. The lender knows that the reason the applicant is applying on a self certified basis is because they don’t have documents to prove what they earn, and therefore will not ask for them. Self certification can be a useful tool where an applicant’s true income differs from their provable or taxable income. Here is an example:

Fred Bloggs runs a small engineering firm which has been a limited company for the past ten years or so. Fred’s accountant has told him that the most tax efficient way to receive his income is to pay himself a small salary and take the rest of what he needs as dividends. Fred calculates that he needs £30,000 a year to live on and so pays himself a salary of £6,000 and takes dividends of £24,000. The company makes around £60,000 profit each year on which it pays corporation tax of £12,000 (20%) leaving £48,000 in the coffers from which dividends can be taken. As the profits of Fred’s company have been taxed already Fred’s accountant works out that Fred can receive approximately £32,000 in dividends without having any more tax to pay. However Fred only needs £24,000, and therefore his accountant transfers the balance to a Directors Loan Account in Fred’s name, creating a loan from Fred to his company. Fred can ask the company to pay him back whenever he wishes.

If Fred was to apply for a normal “full status” mortgage, it is likely that the lender would only allow him to count his basic salary, and some of his dividends as income, and this might not be enough to secure Fred the size of mortgage he wants. By applying for a self certified mortgage, Fred can quite properly say his earnings are £38,000 as that is the total of his income, even though he may not have drawn it all. Indeed, in some cases the accountant might advise Fred that he can increase his income by the value of some items which only reduce profits on paper, such as depreciation.

Obviously, by not seeking documentary evidence of income, the risk for the lender is higher than it would be for full status mortgages. This is often reflected in the interest rate to be charged which is often 1% higher, and the requirement for a larger deposit.

In contrast, “fast track” is where a lender offers the facility to “fast track” a mortgage application by dispensing with the need for documentary evidence of certain things such as income. This facility is generally offered when the lender feels that the credit score achieved by the applicant is sufficiently high for them to be able to dispense with the normal requirements whilst not increasing their risk. The lenders would like applicants to understand that the facility is offered solely to streamline and speed up the process, and not to provide an application facility for those who cannot prove their income. As a result most lenders who offer a fast track facility will randomly sample a percentage of such applications, and will ask for proof of income to be provided. Fast track mortgages should not be applied for by those for which there is no prospect of being able to supply documentary evidence of earnings within a reasonable timescale.

So why the confusion?

Most of the confusion is created by the lenders themselves, and their changing criteria over the years. Whilst the lenders might “like applicants to understand that the facility is offered solely to streamline and speed up the process”, a shortening of processing times is seen by many as simply a by-product, and not the real reason at all.

Prior to the statutory regulation of mortgages in October 2004, the terms self certified and fast track were almost interchangeable. Certainly, the likes of the Abbey and Halifax would advertise a “fast track” policy, but when their representatives came calling they would discuss their new “self certification” facility! Indeed Northern Rock, issued statements denying that they offered self certification, whilst all the time listing fast track cases as self certified on their internal systems! The simple truth was that most lenders wanted the extra market share which came with offering a self certification style product, and competition for market share was fierce.

Nowadays, and especially since the credit crunch took hold, lenders have been far more specific in what their schemes are. Those offering a fast track service are actively sampling a proportion and asking for evidence of income, and some, like the Woolwich are asking intermediaries to confirm that they have seen the evidence in all cases. It is this last point which demonstrates that a faster process is secondary to the real reason for offering fast track. After all, if evidence has to be produced for the broker, it might as well be sent to the lender anyway; the work has been done and the time spent. Except, there is no one at the lender to look at it!

Fast track is offered nowadays because it saves costs, and all other benefits are secondary. Lenders learned some time ago that when “computer says no” or even “computer says yes”, there is statistically a far greater chance that the computer has made the right decision than the human it has replaced. However, checking paperwork is still something which has to be done by a human, and therefore, if the number of pieces of paper can be reduced, so can the number of humans needed to check them.

The lenders would probably say that the savings they make allow them to offer cheaper and better products and keep fees down. In the current economic climate, I doubt there are many who would agree.

Yesterday, the housing minister Caroline Flint announced a package of measures designed to rescue the UK’s failing housing market. Central to her proposals is a rent now buy later scheme designed to help families and first time buyers save for a deposit. She was concerned that the withdrawal of 100% loans from the market, and the vastly increased expense of 95% loans have resulted in a lack of first time buyers, even though reducing house prices should result in greater affordability.

The scheme, which I feel certain has already been referred to as “novel”, “unique” or even “courageous” by Whitehall mandarins, allows a family with an income of less than £60,000 a year the opportunity to rent a property at a discounted rate for a given period of time. Suggestions are that the discounts are likely to be at least 20% of the market rent, and at the end of the period the tenant will be given the opportunity to buy the property, or a share of the property using as a deposit the money saved as a result of the discount.

Flint said: “We are determined to continue to do everything possible to promote long-term stability and fairness in the housing market. The international credit crunch has created significant challenges not just for the UK housing market but in other parts of Europe and the US. However, the long-term need to provide more homes has not gone away. We have a growing and ageing population and will only see worsening affordability unless we increase housing supply.”

In addition, the Government also plans to introduce a system of local housing companies to allow councils and the private sector to work together to develop surplus land. A pilot scheme is to run in four areas, with additional assistance being provided under yet another scheme to enable 75,000 new homes to be built across those towns considered most in need. On top of this, additional funding is to be made available to enable the purchase of surplus housing stock from cash strapped developers for use as affordable homes.

Whilst the announcements have been well received by some, the general feeling is that all these scheme are nothing more than applying a sticking plaster to broken leg. Lembit Opik from the Liberal Democrats, was quoted as saying “Another day, another new affordable housing announcement. The government’s hot air will not hide the fact that 10% fewer shared ownership homes were provided last year than in 2006.”

Whilst we welcome any help which provides greater choice for new buyers, this scheme is simply a sound bite reaction to current difficulties and a further refusal to recognise the true problem. Until mortgage lenders can access funds to lend, and those which do have funds call a halt to the profiteering of recent months, house prices and their availability is likely to be a side issue. Let’s face it, even if house prices did drop by 20%, (the Land Registry says they are still increasing), first time buyers are hardly likely to rush into buying when the main lenders have increased mortgage costs by some 30%, and now require a substantial deposit as well.

The irony of the situation is that it looks as if our Government is returning well and truly to their Old Labour roots, and hoping we don’t notice. Whatever a person’s political views are, allowing someone to occupy a house owned by the council at a discounted rent seems awfully like the days before right to buy. The comparison becomes even spookier when it is realised that the whole “estate” is likely to have been bought by the council at a knock down price. This means that the clock could be turned back on efforts to integrate social housing with private, saying goodbye to the benefits that brings.

A selection of the most recent figures available show that both the Halifax and Nationwide house price indexes showed a monthly drop in May of 2.4% and 2.5% respectively, leading to annual falls of 3.8% and 4.4% with both forecasting further falls. In contrast Prime Location reported a rise in prices of 0.4% giving an annual increase of 6.9%, and the Land Registry reported 0% movement in May with an annual increase of 1.8%

So why the difference? And more importantly, who is right?

To find out the answer to those questions, we need to examine how the data is gathered and identify how that might effect the results. In the case of Prime Location, and similar indexes such as those published by Rightmove, the data is based on asking prices rather than sold prices, and whilst they certainly give a feel for the mood of the market, we believe in this exercise, they should be ignored.

The Halifax and Nationwide indices are based on the sale of properties that they have granted mortgages on, and this is where we begin to see the reason for the difference.

Firstly, the data can be influenced by the number and type of customers applying for mortgages. For instance, if they have a particularly good deal for first time buyers, first time buyers are likely to make up a disproportionately large percentage of the data, which will then be overweight in terms of lower value starter homes typical of first purchases.

Secondly, virtually all property bought with the help of a mortgage will have been “valued for mortgage purposes”. This means that a valuer would have carried out a valuation, the sole purpose of which is to confirm to the lender that the value is correct. If the valuer makes a mistake, and it turns out that the house is worth less than the valuation, the lender could lose out. Therefore, when the media is full of predictions of a crash, the valuer is likely to take a much more conservative view, especially if the lender employing him has already said publicly that they expect house prices to drop by 9% this year! A self-fulfilling prophesy?

The Land Registry data is compiled from every transfer of ownership of registered land, regardless of whether there is a mortgage on the property or not, and the sample is therefore significantly larger. Whilst some of the data will have been influenced by the policies and practices of lenders and the valuers, the influence is much less with such a wide sample.

The above has, I hope, explained why there are differences between the various indices. As for who is right, that’s easy, it’s the Land Registry. It is just such a shame that many parts of the media continue to show a preference to bad news and scaremongering, rather than reporting the facts.

The scheme, which is run in association with The Mortgage Business (TMB) who themselves are part of the HBOS group, is a Self Certified Lifetime Tracker mortgage for self builders and renovators providing advance stage payment lending to £500,000. Previously the maximum loan was capped at £350,000.

The product is priced at 2.44% over the Bank of England base rate for the life of the mortgage, giving a current pay rate of 7.44%. An early repayment Charge is payable at 1% of the amount redeemed prior to the 30th September 2011. There is an arrangement fee of £995 for loans up to £350,000, which increases to £1,995 for loans between £350,001 and £500,000.

The Buildloan products have always had a welcome place in the market, being unique in providing funding when starting each stage of the build rather than at the completion of each stage. With lending of up to 95% of the cost of aquiring the land, and 95% of the cost of the build (in certain circumstances), the Buildloan/TMB product has been instrumental in allowing self building to become an option for many who otherwise wouldn’t have had the available cash flow.

The reason I say might have been offered, is simply due to the fact that the building society would be lending money it had taken in as deposits from savers. If insufficient deposits had been received, then regardless of how good an application was, no money could be lent out.

By the mid 1980’s, the industry saw the arrival of centralised lenders, many of whom were branches of overseas corporations. Adverts started appearing on TV for the likes of the Household Mortgage Corporation, and names such as Bear Stearns and GMAC (General Motors) were starting to be heard. These new centralised lenders were different, in that the money they lent was not money that had been received in as deposits, but money that had been borrowed from other banks and financial institutions. This period in time also saw the emergence of mortgage brokers, who provided cheap and efficient distribution for these new lenders, most of whom did not want to invest in large branch networks.

As time went by, many traditional lenders also saw the advantage of lending money that had been borrowed from other lenders, and so the practice spread. In some cases, the lender themselves would not want to actually administer the mortgages themselves, and so, every now and then, they would package up the mortgages they had granted, and would sell these onto another lender in a process called securitisation. The whole process worked very well and benefited many, as long as the quality of the mortgages which were sold on was accurately known and graded.

In the UK, we operate in a regulated market, and as such we should be able to be reasonably confident that all those who have been granted mortgages are able afford them and have the ability to keep up with the payments. Of course there will always be those who slip through the net, but for most lenders, accounts in serious arrears are often less than 1%. However, in the United States, the distribution of mortgages is far less regulated, and it has been possible for vast numbers of mortgages to be granted to those who wouldn’t qualify if they were in the UK.

Typically, the applicant would have been talked into taking a mortgage deal with a very attractive initial discount, ignoring the fact that as soon as the discount had ended, the applicant would not be able to afford the repayments. However, even this would not necessarily be a disaster if the mortgage holder was able to sell the property and repay the mortgage, and prices were rising very fast in parts of the US.

The problems started when it became clear that there were vast numbers of people who had mortgages they couldn’t afford, and the market started to become flooded with property being sold on a forced sale basis, meaning that the ever increasing property price rises suddenly reversed. As most of these mortgages had been securitised, it meant that the “structured investment vehicles” they had become was no longer worth what everyone thought they were.

Of course, financial institutions and markets being as they are, every Tom Dick and Harry had wanted a piece of the pie and there were many institutions who had invested in structured investment vehicles now faced some serious losses on their investment. The problem is that most institutions have had difficulty calculating their own losses, let alone being able to assess the losses suffered by their competitors, and have therefore been very reluctant indeed to lend money to each other; this is why the credit crunch as more properly referred to as the liquidity crisis.

For those lenders who had built their business on the back of being able to borrow the money to lend, this was a serious turn of events, most notably demonstrated by the difficulties suffered by Northern Rock. What has been less well publicised is the number of centralised lenders who have either gone into liquidation, or simply just shut up shop for the time being.

Whilst the clock has not quite gone back to the mid 1980’s, it is certainly true that those lenders with money to lend, are those who have also receive deposits, and that is why there are quite so many television adverts at the moment for savings. It has been said that many of the lenders who are able to grant loans are simply profiteering, and it is a hard charge to refute, when the likes of the Nationwide announce increased profits on the back of 40% less lending!

Will it get better? The general thinking in the industry is that there will be return of activity and an eventual loosening of some criteria, but this might take some time. There is almost unanimous agreement that there will never be a return to the days of being able to borrow 90% of a property’s value with bad credit and no proof of income, but that isn’t necessarily a bad thing. We will know that the market is starting to recover when we see the first lender introduce a 100% product that does not need a guarantor.

The research for the report was conducted by independent financial services market research company NMG, who were tasked with examining the difference in value obtained by those using a broker to source the best mortgage deals, and those who went direct to lenders.

Chris Cummings, Director General of the AMI said “Intermediaries are able to identify the most suitable product for the consumer at a competitive price”. He further stated “Analysis of consumer attitudes shows they value this advice much higher than that provided by lenders, and in these difficult times it is more important than ever for consumers to access good financial advice”

Cummings adds: “Advisers know their clients and use this insight and their knowledge of the market to identify the most suitable and most price competitive products for the client. If the government wants to achieve its aim of more fixed rate mortgages, this will be done via intermediaries.”

It is thought that one of the reasons mortgage brokers offer such value is that they will look at the true cost of a particular deal, taking into account the effect of any charges. When consumers approach a lender direct, their decision as to which mortgage is best is often based on seeking the lowest headline rate, and with the lowest rates now attracting the highest arrangement fees, this can often prove to be an expensive mistake.

The figures seem to support the views of both us and other industry commentators, who believe talk of a 30% fall in house prices to be nothing more than scaremongering with little basis in fact. Indeed with interest rates forecast to remain level, and unemployment relatively stable, there does not appear to be huge scope for significant increases in arrears and repossessions.

There is a significant body of opinion that believes that homeowners will simply not accept that they have to effectively give their home away, and will sit tight and ride out the current difficulties. These latest figures from RICS seems to suggest this is exactly what is happening.

Priced at 5.78% (cost for comparison 7%), the fixed rate remortgage deal comes with a free valuation and free remortgage legal fees.

The scheme is only available through selected intermediaries, including the Mortgage Warehouse.

We hope this might prompt other lenders into reducing rates over the coming months.

On the one hand, the website housepricecrash.co.uk was registered in 2003, and now, some five years later we actually do have falling house prices. It is difficult not to have admired their tenacity in the face of the facts over the years, and now that their moment of triumph has arrived, it is not for me to belittle it with reason.

Indeed, I can even understand the position taken by Mr D’Arcy of fool.co.uk who tells us that he had the foresight to sell in 2005 and is now just waiting for a 30% correction (he hopes it will be 50%) before getting back onto the housing ladder. Selfish yes, but completely understandable.

What I find hard to accept is when someone who should know better, and is in a position of authority, publicly announces their expectation of a 30% crash. Yes Mr David Blanchflower, member of the Bank of England Monetary Policy Committee, I mean you.

Now, it may be that Mr Blanchflower, who is one of those who sets the Bank of England base interest rate, is playing sophisticated politics, and hoping to manoeuvre his MPC colleagues into earlier and steeper base rate cuts. But whatever he is doing, he is causing public worry and consternation, and should in any event leave the politics to elected politicians.

Now, we do not profess to have a crystal ball, nor do we profess to have any form of economics qualifications, but we do like to think we have a modicum of common sense. Many of those who have forecast a house price crash over the years have cited the growing gap between house prices and average incomes as the reason. Indeed, you will be able to uncover news details from as early as 2001 and 2002 where commentators were forecasting the bursting of the bubble. What most of them fail to appreciate is the role of interest rates in the whole process.

House prices do not crash because of a lack of buyers able to afford them. They may experience a modest correction, but a lack of buyers tend to lead to a stagnation of the market rather than any sudden reduction, and with lending volumes at roughly 50% of what they were, this is what is happening now.

House prices do crash when current owners can no longer afford their mortgage payments and are forced to sell, and the two main causes of payments being unaffordable are rising interest rate and unemployment, neither of which is currently forecast to any great extent.

To use a very basic (interest only) example, if interest rates were 2%, a mortgage of £100,000 would be affordable by someone earning £10,000 as it would represent a cost of just 20% of their gross income, even though the loan was ten times their income. Conversely, if interest rates were 15%, a £100,000 mortgage would likely be unaffordable to someone earning £30,000 as it would represent a cost of 50% of gross income, even though it is only just over three times income.

If house prices were to fall by 30%, it would mean that everyone with a mortgage of more than 70% would be in negative equity. When the costs of moving were added, it would probably mean that anyone with a mortgage over 65% would be unable to move unless they had additional funds from elsewhere to clear their mortgage.

This returns me to what I believe is the central question, and the question which is still unanswered by those forecasting a huge house price crash: If Mr average can afford to pay his mortgage now and would get less than he owed if he sold, why would he sell? The answer is of course, that in the majority of cases he wouldn’t. Most people will simply sit it out and wait, because they know that all the time they can afford their mortgage they do not have to give their house away, and eventually, whenever it may be, the housing market will return to some form of normality.

Mortgage Offer
Following receipt of the valuation report, the lender will check that all other aspects of your mortgage file are in order. In most cases, the lender will have already written away for the various references which will be needed to back up what you have put on the application form, but it is at this stage that any final questions will be asked and checks made. It is quite normal for a lender to carry out a further credit check at this stage, just to check that matter are as they were when the application was made. Assuming that all is in order, the file will be “passed for offer”, which simply means that the formal paper offer will be produced and sent to your solicitor.

In fact, it is normal for three copies of the offer to be produced. The main copy is sent to your solicitor, along with a set of additional “instructions” detailing how the lender wants matters dealt with and any additional requirements which are needed. An example of this might be an instruction to the solicitor to ensure that the lenders interest is noted on a buildings insurance policy. The second copy is sent to the applicant themselves, sometimes with other paperwork such as a mortgage deed for signature. The third copy will be sent to the intermediary.

A good intermediary will check their copy of the offer carefully, and will bring to attention any instances where the offer differs from the application. Sometimes, it can take several attempts for some lenders to get the offer exactly right, and a good broker can really make a difference at this time. Do remember, however good your broker or solicitor, and however much faith you might have in them, you must make sure that you fully understand every aspect of your mortgage offer. If you are in any doubt, ask.

Signing the Contract
As soon as your solicitor has received and checked your mortgage offer, and received and checked all the necessary searches (unless already provided as part of a Home Information Pack) he will arrange a meeting with you. During this meeting, the solicitor will explain to you the contract that has been drawn up between himself and the sellers’ solicitor, and will also explain the terms of the mortgage offer, and any other legal aspects associated with the sale. It is very important that you understand everything that you are told, and therefore you must not let the meeting move on until you are absolutely satisfied. When you are satisfied, your solicitor will ask you to sign the contract, and at this stage will also ask you to give him a check for the amount of the deposit. Solicitors have to keep your money separate from their own, and will therefore pay your deposit cheque into their “clients” account for it to clear (normally five days). In practice, contracts are standard documents and vary little from one sale to another. Because of this, sometimes a solicitor will send you the contract and other papers to sign through the post, especially if you have chosen a solicitor who is not based locally. This is not necessarily a disadvantage, but many first time buyers prefer to instruct a local solicitor who they can go and see.

Exchange of Contracts
In the same way as you will have met up with your solicitor and signed a contract, the seller will have met up with their solicitor and signed an identical contract. This means that as soon as your deposit cheque has cleared, the solicitors will be able to exchange contracts. This is a very important part of the process, as up until this point, either the buyer or the seller is able to pull out for any reason at all, and without explanation, and without having to re-imburse the other for their abortive expenses. As soon as contracts are exchanged, both the buyer and the seller legally have to go through with the sale.

In the past, exchange of contracts was a physical exchange during which the two solicitors swapped over the two contracts. Nowadays, exchange is carried out over the telephone, and in future will almost certainly be accomplished via some form of electronic system. At the time the contracts are exchanged, the deposit will be paid by your solicitor to the sellers solicitor and deposited in the sellers solicitor’s “clients” account. The deposit is never given to the seller, and is always held by their solicitor. At the time of exchange, a date is normally set for “completion” when you will move in.

Insurances
Because you are legally bound to complete on the purchase of the property, it is essential that any insurances are put into force at the time of exchange of contracts. This includes both buildings insurance, and any life assurance that you are taking. If you get run over by a bus after exchange of contracts, the administrators of your estate may still need to complete the purchase. As it is unlikely that the mortgage lender will honour the offer (after all who will pay the mortgage), you will need the proceeds from the life assurance instead.

Completion
Completion is the term given to the last stage of the house buying process and is the time at which the property is fully paid for and you can get the keys and move in. A few days before the date of completion, your solicitor will have “requested funds” from the mortgage lender, and they will have transferred the amount of the mortgage to the solicitor. If there are any charged which are “paid on completion”, these will have been deducted from the mortgage before it was sent to the solicitor. The solicitor will normally deduct his charges as well, and therefore you may have an additional balance to pay in this respect. If so, the solicitor will have told you in good time to ensure that he had cleared funds from you in time for completion. On the day of completion the balance of the money required to buy the house will be sent from your solicitor to the sellers’ solicitor and you will be able to get the keys and move in.

Do remember that interest will be charged on your mortgage from the day the funds are sent to the solicitor, not from the day you move in.