Self certification homeowner loans and mortgages have been around for several years now and, although they have had a lot of bad press over the course of the past couple of years, due to being used fraudulently to over estimate a person’s income in order to allow them to obtain a larger loan than they can realistically afford, when they have been used correctly, they have provided an important source of loan funding for many self employed people, along with those who may have several sources of income, or an unusual or irregular pay pattern, such as sales people working solely from commission payments, for example.
But the effects of the credit crunch and recent banking crisis have had a dramatic effect on self certification loans of all kinds.
A recent survey from Evaluate Technologies has revealed that self certification loans now only account for less than 2 per cent of the total home owner loan market, with only 22 products available on the market and all of these are on a fixed rate basis. Prior to the credit crunch, in December 2007, loans on a self cert basis made up somewhere in the region of 17 per cent of the total home owner loan market, with 381 different products to choose from, on a variety of fixed and variable loan types.
Julie Speed of Evaluate Technologies said “The plight of the first time buyer has been well highlighted but the self employed have been equal victims of the shrinking mortgage market. Lenders have sought to de-risk their mortgage offering and anyone whose income is difficult to prove is by definition a higher risk customer. Honest, hard working self employed people have few options to choose from and brokers face a stiff challenge finding suitable products for the self employed.”
Industry experts and consumer groups alike have been greatly concerned over the increasing level of arrears and defaults on homeowner loans over the course of the past twelve months or so and although the situation within the housing and homeowner loan markets seem to be picking up slowly, with regard to new sales and loans, many borrowers with an existing loan secured on their home are still finding it difficult to maintain their monthly repayments and stop themselves falling into the problem of growing loan arrears and the eventual possibility of having their home repossessed.
The Council of Mortgage Lenders (CML) released the latest figures on repossessions earlier this month, which showed that the number of people losing their homes through loan arrears and defaults had actually fallen by ten per cent in the second three months of the year, compared with the first quarter.
Despite these statistics, the housing charity Shelter has warned that this could simply be a dip in the overall figures and it is quite likely that we will see another, possibly larger, wave of loan arrears and repossessions when interest rates on home owner loans and mortgages eventually increase again, possibly as soon as the beginning of next year.
Shelter has said that due to an increase in the unemployment figures, a growing number of borrowers are already struggling to keep up with their homeowner loan repayments and a rise in interest rates could push many of these individuals beyond their financial breaking point. Kate Boycott of Shelter said that banks and building societies needed to do more to help those borrowers struggling with their loans, “Despite many lenders using more tolerant measures to help their customers, further action is needed if we are to prevent a second and more devastating wave of repossessions.
Banks have been bailed out with billions of pounds of taxpayers’ money. Now it’s time to ensure they do everything they can to keep customers in their homes.”
Despite the fact that the Bank of England base rate of interest is currently at its lowest level in history, at 0.5 per cent and has been for several months now, banks and building societies are still placing a large premium on fixed rate homeowner loan deals, making them an expensive way to borrow money.
Coupled with this is the fact that swap rates, the rate at which loan companies borrow funds on the wholesale money markets, have become cheaper again, whilst lenders’ fixed rate loan deals have remained at the same rate and in some cases, the interest rate has actually increased. This has led to claims that banks and building societies are profiteering from borrowers who have very little alternative option other than a fixed rate loan at the present time.
The average interest rate charged on a fixed rate homeowner loan is currently 5.18 per cent, yet the cost of wholesale loans to lending institutions has fallen to 2.04 per cent, creating the biggest margin ever recorded. It would appear that lenders are trying to recoup their previous losses of the past couple of years by keeping fixed loan rates unrealistically high and many are cashing in on borrowers who are worried that interest rates will increase dramatically next year if they opt for a variable or tracker rate loan.
Michelle Slade of Moneyfacts.co.uk commented, she said “Normal rules where lenders pass or decrease rates based on the cost of funding seem to have well and truly gone out of the window. Fixed rates are the preferred option for many borrowers and lenders are cashing in on those seeking a new deal. It appears that those looking for a new deal are subsidising the revenue lenders are losing from existing customers on low standard variable rate or tracker deals, some of which are currently paying less than one per cent.”
The effects of the credit crunch and recent recession in the UK have had a profound impact on the personal loan market, both in forcing lenders to restrict the amount and number of loans they offer to customers and also making consumers far more wary of borrowing money and therefore taking a more cautious approach to applying for a new personal loan.
As a result of this, the latest figures from the Finance and Leasing Association (FLA) have shown a significant reduction in the amount of new loans offered to borrowers over the course of the past twelve months.
The figures from the FLA show that, overall new lending dropped by around 17 per cent over the last three months, compared with the same period for last year. The worst hit areas were unsecured and secured loans, with sales of unsecured loans falling by 43 per cent and secured loans by a staggering 84 per cent during the second three months of this year, compared with twelve months previously.
Geraldine Kilkelly of the FLA said “In the last six months we have seen new credit levels continue to fall. The ability of lenders to make available to consumers reasonable priced credit is at risk of being hindered by a barrage of new regulation. The FLA’s members support responsible lending practices and comply with a strict code of practice to ensure that consumers are treated fairly and are able to make informed decisions when taking loans.
But the wave of new regulation from the Government and Brussels could jeopardise lenders’ ability to make available the credit that will undoubtedly be needed to support a sustainable economic recovery.”
The recent trend of increasing activity in the housing and homeowner loan markets over the past few months has continued once again throughout the month of July this year, according to the latest figures from the Council of Mortgage Lenders (CML).
The CML figures show that gross lending on mortgages and homeowner loans increased by 26 per cent in July alone, with a total of £16 billion worth of new loans being offered over the course of the month, compared with just £12.7 billion in the previous month.
Following historically low levels of new lending at the end of last year, there has been a steady increase in the level of new loan activity over the course of the year so far and although the figures show positive movement, total lending is still significantly lower than it was at the same time last year, when there was £24.9 billion worth of new homeowner loans offered. In fact, despite the recent increase in activity, the number of new loans is currently at its lowest level since 2001 and £11 billion below the seven year average figure for July, according to the CML.
The CML said that the increase was largely due to new homeowner loan for purchase, rather than remortgage and that it did not expect further significant improvements due to the current economic conditions. Paul Samter of the CML said “The bounce back in activity from the extreme weakness around the turn of the year, coinciding with a seasonal bounce, is limited in how far it can go against the current back drop. We expect improved sentiment to support the market, but a further significant pick up is unlikely with so many obstacles in place.”