I was reading an article in MoneyWeek when one sentence leapt out at me:
[The Financial Services Authority (FSA) report into the mortgage market that lays out plans to outlaw self-certification mortgages] is a shocking report. Not because it wants to ban self-cert – clearly it is ludicrous to lend money to people who can’t prove they can repay it […]
It might sound obvious to the author of the article that people should be able to prove their ability to pay, but isn’t it ludicrous to think you can prove this?
A typical mortgage will have to be repaid over a long time, e.g., 25 years. There are only two ways in which you can prove your ability to pay: Either you have the money already (but then you wouldn’t need the mortgage in the first place), or you have a guaranteed income in a job you cannot lose.
Until fairly recently, there were many jobs that practically were for life, but these days real job security is the exception, not the rule.
In other words, the only thing people can prove is their current income, not their future earnings.
Giving mortgages only to people that currently have a job but not to those who are self-employed or who have just started up a company seems ludicrous. Anybody with a job can be out of it tomorrow, while self-employed people will typically be more in control of their own destiny.