It's a dead self-cert: things will turn nasty if interest rates rise

Brokers could face misselling allegations by borrowers using self-certification mortgages as a way of borrowing beyond their affordability.

As the Bank of England warns of overheating in the housing market, independent advisers warns that brokers who recommend these mortgages - which do not require proof of income - may find themselves accused if interest rates rise and their clients fail to meet repayments.

Advisers suspect some brokers are allowing or encouraging borrowers to use self-certification as a means of inflating their income when applying for a mortgage. When no proof is required, borrowers can be offered loans far greater than they would be offered on the basis of their true income.

It is feared that if interest rates rise from the current 4 per cent Bank of England base rate, these borrowers could find themselves in arrears and ready to blame bad advice for their circumstances.

Andy Frankish, a director at independent mortgage adviser Mortgage Talk, says: 'Although self-certification mortgages are a very useful product in the right circumstances, many borrowers view them as an easy way of obtaining a big loan.

A large degree of responsibility for selling these products lies with mortgage brokers.' Self-certification mortgages usually require a larger than average deposit of up to 25 per cent. These products were originally designed for self-employed workers who have difficulty proving their income, as well as borrowers with salaries largely dependent on commission.

Self-certification is also suitable for professionals who start on a low salary, but whose incomes rise rapidly. However, borrowers outside of this target audience have woken up to ways of using these mortgages.

David Hollingworth of independent financial advisers London & Country says: 'We get calls from would-be clients who straight away ask for a self-cert mortgage. You have to ask yourself why.'

These borrowers hoping to inflate their income on a self-cert application are not just looking to play the system, they are committing mortgage fraud, he warns.

While in these cases it is more a case of borrowers misbuying their mortgage, Frankish believes there are some brokers who encour age self-certification for the wrong reasons.

Under the current regulatory framework these borrowers have very little protection. The Financial Services Authority does not take over the regulation of the mortgage market until 2004. Until then borrowers who have been missold self-cert products will have nowhere to turn for redress.

Some protection is offered by the Mortgage Code, a voluntary code of practice enforced by most reputable brokers and lenders.

It requires brokers to ensure that the loan is suitable and affordable before making any recommendation. If a broker is found to have breached these requirements they can face disciplinary action, fines and, in the worst cases, being banned from practising as a mortgage broker.

The Mortgage Code Compliance Board recognises self-certification as an area of concern. Chief executive Luke March says: 'There is always the possibility people will bend the rules. We would only recommend it in extreme circumstances.'

Because of such warnings some lenders are keen to ensure their self-certification borrowers are genuine cases and unlikely to default on their repayments, even if interest rates rise.

Bristol & West managing director Stewart Wright says: 'We are very clear about looking for responsible borrowers with clean credit histories and with every other indicator showing they are unlikely to default.'

Those borrowers with circumstances genuinely fitting self-certification should note that many lenders charge interest rates of between 0.5 and 1.5 per cent higher than mortgages where income is proved. However, if they have a large deposit of 25 per cent or more it is possible to go to a high street lender, such as Halifax, and have the choice of its entire mortgage range.

Borrowers should also watch out for an extra charge on self-certification products, known as the high loan fee. Lenders, including Bristol & West, charge 6 per cent on the excess of your loan over 75 per cent. If, for example your mortgage is 80 per cent of the value of your ?110,000 property, the high loan fee would add an extra ?330. Despite the concerns surrounding self-certification, the signs are that the market is growing, giving borrowers more choice and an ability to compare products.