New rulings proposed by Financial watchdog the FSA (Financial Services Authority) look set to minimise potential debt management issues further by calling an end to “Liar Loans”.
The self-certificate home loans, labelled “Liar Loans” as they require no proof of earnings or additional income, look set to be outlawed under new proposals from the FSA.
Following in-depth analysis, the FSA found that there was widespread evidence of fraud and a large number of clients in arrears among self-certified loans. Lenders will in future be required to directly verify the income of applicants and not rely on information from mortgage brokers.
The move sets out a clear warning that the days of homeowners remortgaging so that they can splash out on holidays or pay off outstanding credit card debts could be over shortly.
However, the watchdog didn’t advocate an outright ban on mortgages of 125 per cent loan to value, or on individuals taking mortgages of up to five times their salary, but instead called for in depth tests on a customer’s affordability.
This move, along with other proposals, forms part of the FSA’s effort to ensure another financial crisis is avoided in future and that banks return to more sensible lending practices.
Remortgaging to pay off credit card debts and other consumer credit rose dramatically at the turn of the millennium as households used their homes as a cash machine. The FSA’s study discovered that between 2000 and 2007 £315bn was borrowed by British households against their properties for general consumer spending and to help them get out of debt, rather than to increase the value of the homes through improvements like extensions.
Ivan Cooper, Chairman at debt advice specialists Chiltern, said: “The door looks set to be closed on households who used their properties increasing value to get out of debt.
“More homeowners will need to seek impartial debt advice or explore alternative methods of debt management, such as IVAs (Individual Voluntary Arrangements) and other professional debt management programmes.”
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