House for sale
Originally uploaded by Mundoo
Until last year, most British banks offered a “self-certification” mortgage, which meant you didn’t need to prove your income. These days, even self-employed people need to document their past and future earnings. This is supposed to prevent people from taking on mortgages they can’t afford.
It’s not prudent, however. There are very few safe jobs these days – the speed with which Murdoch shut down News of the World is just one example – and although some people find it easy to find another job if they’re made redundant, it’s tough for many people.
Crucially, banks don’t work out the probability of redundancy and the projected time it takes to find a new job given your educational background and career so far. Instead, they treat any permanent job as being safe and happily lend you four time your current salary, while self-employed people with variable earnings and people who have recently started up a new company (which is just what the economy needs at the moment) are turned away.
In the old days, wage inflation meant that even if your next job was a step down the career ladder, if was likely to pay more or less the same in absolute terms. However, these days wage inflation is very low, and many people are having to take big pay cuts in order to get a job at all, so you can’t just assume that people can afford tomorrow what they can afford today. They also don’t deduct money for child-care costs before working out how much to lend you, which is equally ludicrous.
The other problem with the current lending policies is that they completely disregard the actual risk to the bank of not getting their money back. If your house is worth £200k and your outstanding mortgage is £50k, there is practically no risk in lending you that sum, because the money can be recovered unless house prices fall by 75% (which even the most pessimistic forecasters don’t predict).
If the banks were truly prudent instead of being obsessed with irrelevant box-ticking, they would completely change their system. What they should be doing is this:
First of all they should work out whether the borrower wants to borrow more than can be recovered in a repossession. If not (i.e., if they want to borrow less than the property will be worth even after a house-price crash), they should hand out advice about the trauma of having your house repossessed and then let the borrower make the decision, without going through the hassle of estimating salaries and the like. If the borrower on the other hand wants to borrow more than can be recovered in a repossession, the bank should work out in detail the projected salary growth, the risk of unemployment, etc. and then charge enough money to make sure than they on average make a profit.
The banks would make more money that way, and there would probably be fewer personal bankruptcies, so I don’t understand why they continue with the current system.