Last week, the chairman of the Financial Services Authority, announced that they would be pressing ahead with proposed plans to ban self-certification mortgages.

Consumer protection was cited as one of the reasons for taking this decision which could effectively mean banks having to conduct “affordability tests” for every new mortgage in the future.

Lesley Titcomb, Chief Operating Officer at the FSA said

“There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford it.”

That is a very reasonable point of view and one with which it is hard to disagree. However, this ban will effectively freeze out a significant section of society: the self employed.
Latest figures show that self certification mortgages accounted for 43% of all mortgages in the first quarter of this year, so the impact of such a ban is likely to be very considerable indeed.

One comment on this news from the BBC website sees the need for something to replace self-certification for the self-employed:

“…ending of self-certification will impact mostly upon the 13% of the workforce who are self-employed…..published accounts cannot give an accurate, current picture of disposable income. They also tend to take full advantage of tax avoidance accounting in order to minimise tax liabilities, which leaves them disadvantaged in the mortgage stakes. …..self-certification was a significant contributor to the sub-prime lending crisis……the FSA should look at new ways to assess the credit worthiness of the self-employed, possibly by reviewing bank statements over a 12 month period.”

This is certainly an interesting debate, with people already struggling to get mortgages and finding themselves stuck renting, this new ban will make it even more difficult for people to become homeowners.

How does this affect you?

Debt resolution firm ClearDebt’s user data puts a human perspective on the quarterly insolvency figures issued by the Insolvency Service today, Friday 7 August 2009.

• Youngest debtors are fastest growing group – 18-24 “debt worrieds” have increased by 19%
• Debtors approaching retirement have highest unsecured debts (£40,798).
• Self-employed owe most but have seen income slump – now owe 219% of take home pay.
• People with children are most prudent – debt virtually unchanged.
• Yorkshire and Humberside – fastest growing region for debt (10% increase. in debt)
• Eastern England – highest debt region (average £33,208)
• Luton – fastest growing debt in England – average consumer debt nearly tripled between 2008 and 2009
• Slough – most indebted town in England – debt worriers owe £47,500.
• Debt enquiries to ClearDebt up 74% in 12 months.

Comparing the first six months of 2009 to the same period (January to June) 2008, ClearDebt’s analysis of 11,853 indebted individuals in England and Wales, showed a massive rise in debt enquiries, highlights a debt crisis for self-employed people and confirms people with families have been hugely prudent in the crux of the crunch.

Average unsecured debt has risen by just 4% to £27,072 but lower incomes have meant that the ratio of annual take-home pay to total unsecured debt has risen by 8% – to 172%.

Self employed people with debt problems are in crisis. They have seen their average income decline from £36,000 in 2008 to £32,000 in 2009 and they now have average unsecured debts of £40,078 (£12,851 more employed people). ClearDebt’s self-employed sample has seen their debt-income ratio rocket by 25% in a year, now owing 219% of their annual take-home income.

Britain’s most prudent debtors are those with children. They have reduced their unsecured debt by 1% between the period’s surveyed: Debtors without children have increased their debt by 7%.

Worryingly, Britain’s youngest debtors (18-24) now represent 17% of people seeking ClearDebt’s help. But, older people (55-64) are the biggest debtors – owing £40,798 and with a debt/income ratio of 250% – 29% higher than 2008.

Commenting on the figures ClearDebt Marketing Director, Andrew Smith, said:
“The government should be particularly concerned by our self-employed debt figures. This may show that banks are unwilling to make business loans to these people – who will play a major role in economic recovery. Instead, small entrepreneurs may be keeping their businesses financed through expensive credit card borrowing and personal unsecured loans, whilst seeing their ability to repay plunge. This could be a major accident waiting to happen”.

-ENDS –

Further information:
Andrew Smith:
andrew.smith@cleardebt.co.uk
0791 240 7532 or 0161 968 6825

Jacqueline Cohen: jacqueline.cohen@cleardebt.co.uk
07976 739 1250 or 161 968 6825

Note for Editors:
Analysis based on 11,853 enquiries submitted to ClearDebt : 4,305 between 1 January and 30 June 2008 and 7,550 between 1 January and 30 June 2009.