Risk of default increased by lack of checks

According to a recent report released by the UK’s financial regulatory body the risk of homeowners defaulting on their mortgage repayments has been increased as a result of various lenders allowing them to borrow money to purchase a home without carrying out adequate checks into their income.

The Financial Services Authority claims that some lenders have been allowing consumers to borrow money to buy property but have failed to determine whether they can actually afford the repayments based on their income.

With a series of five interest rate rises already having taken place in the past year, along with the threat of further rises, many homeowners with variable rate mortgages are struggling to keep up with repayments, even though they may have been able to comfortably afford the repayments when they took out the loan. However, for those that were struggling initially, as a result of being able to borrow more money than they could actually afford, the interest rate rises could tip them over the edge.

The FSA has been investigating the sub-prime market, where brokers and lenders seem to be unable to show whether the borrower can actually afford to make repayments on the amount that they borrow. According to reports around one third of brokers have been unable to confirm whether a borrower could actually afford the mortgage, and over half of them allowed borrowers to self certify their income.

One MP stated: “Talking about a few rogue brokers is just skimming the surface of the problem. While rogue brokers are a problem, the more pressing issue is high street lenders aggressively trying to build market share. Lending income multiples for mortgages are now at an all-time high and, with interest rates set to rise further, the outlook for many homeowners looks grim.

Tom Smith
13th September 2007