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Self Cert Mortgages
Self Cert Mortgages
Proof of income is often one of the first things a lender will ask for when it
decides whether to grant you a mortgage. But if payslips are hard to come by,
there is another option. Laura Milne explains
For growing numbers of workers, whose incomes do not come in neat monthly pay
packets, selfcertification
is becoming an increasingly popular way of scaling the property ladder.
With a standard
mortgage, lenders traditionally require three months of payslips if you are
employed, or three years of accounts, signed off by an accountant, if you are
self-employed.
Producing this evidence can be tricky if you have been self-employed for less
than three years, are on a short-term contract or derive your income from
several sources.
"Self-certification is increasingly popular because it allows you to include all
of your earnings - including bonuses - for mortgage calculation purposes,
thereby maximising what you can borrow," says Simon Tyler of broker Chase De
Vere Mortgage Management.
"The same goes for income from other sources, such as rental income from
buy-to-let properties, which if you do not take the self-certification route,
lender's don't usually recognise as income at all, which is very harsh."
More than 3.6 million people, equivalent to around one in eight of Britain's
workforce, are self-employed and self-certification mortages now account for
eight per cent of all home loans.
Specialist
‘Self-cert’ loans allow self-employed borrowers to state their income and rely
on their individual credit reference for a mortgage, instead of providing
payslips or an employers earnings statement. Some specialist lenders, such as
GMAC, simply ask borrowers to sign an affordability declaration.
This does not mean, however, that a lender will hand over the money without
asking any questions. "Asking for salary slips is only one of the checks lenders
do to make sure you can afford the repayments," says Paul Fincham of Halifax. "A
lot of checks go on behind the scenes. A lender will look at your credit record
and affordability of the loan. They may look at what your job is and ask whether
it would be reasonable for you to be earning what you claim. This enables
lenders to build a comprehensive picture of whether someone is a reasonable
risk."
Abuse
Lenders may also carry out spot checks to make sure borrowers are not abusing
the system. Self-cert mortgages came under fire last year after an undercover
television investigation led to claims that some advisers were encouraging
borrowers to lie about their income to secure the mortgage they wanted.
The Financial Services Authority (FSA) stepped in to investigate the whole
sector, but found that such practices were not widespread and controls were
generally adequate. Ultimately though, it is the borrower’s responsibility to
make sure that the information on the mortgage application is accurate.
Caution
When self-certs were first introduced about 15 years ago, banks and building
societies were extremely cautious about lending to self-employed borrowers, who
they perceived to be a more risky bet and interest rates were often
eyewateringly high, but lenders have since recognised the demand for a more
flexible approach and competition has forced rates to fall accordingly.
"You can still expect to pay more for a self-cert mortgage, " says David
Hollingworth of broker London & Country. "The typical rates are likely to be
about half a per cent higher than a standard deal or maybe more. Having said
that the market has become very competitive and lenders don't like turning
business away if they can help it."
Emma Payne of Mortgage Express, the specialist lending arm of Bradford & Bingley
argues that there is no longer a huge difference between the rate you can expect
to get on a standard mortgage and a self-cert deal. "Self-cert deals are no
longer just aimed at the self-employed," she says. "People who earn
bonuses or commission, work second jobs or earn income from buy-to-let
properties may find a self-cert deal more suited to their needs. It's a huge
amount of work to collate all the information and references and proof of income
normally required.
"There are a lot of self-cert lenders out there is certainly plenty of choice
for borrowers," she adds.
Top rates
The choice of self-cert lenders has never been wider. Some are well-known names,
such as Bristol & West, Cheshire Building Society, Bank of Scotland, Coventry
Building Society and Bank of Ireland. Newer entries to the market, such as
GMAC-RFC, UCB Home Loans, Freedom Lending and the Mortgage Business are, as yet,
unfamiliar to borrowers.
Birmingham Midshires is currently offering 4.49 per cent fixed until January 1
2008, while Standard Life has a three-year fixed deal until March 2008 at 4.65
per cent which easily rival the best buys of the standard market.
But although rates have improved for self-employed borrowers, there are still
some catches. Some self-cert lenders refuse to consider first-time-buyers or new
business owners. Unless a self-employed person has been trading for at least one
year, preferably two, they usually cannot just sign a statement of earnings. Two
years' full accounts plus two year's full tax liability may be requested.
The majority of self-cert lenders will also require a larger deposit from
borrowers. Coventry, Bristol & West and Bank of Scotland all demand a 25 per
cent deposit, although Freedom Lending, UCB and Birmingham Midshires will settle
for 15 per cent. Premier Mortgage Service and Capital Home Loans are among the
few prepared to accept 10 per cent.
Some self-cert deals, including those offered by Cheshire, Standard Life Bank
and Capital Home Loans include a flexible option. This feature allows borrowers
to overpay or underpay on their mortgage if they need to.
"It's particularly useful for workers who earn seasonal bonuses," says Payne.
"Mortgage Express allows borrowers to overpay up to twice the monthly amount,
without any penalty. You can also underpay by the same amount you've overpaid.
For example, if you paid £200 extra last month, you can underpay by £200 this
month if you need to."
However borrowers should think carefully before opting for a self-cert loan
without shopping around first says Hollingworth. "Self-cert loans are no longer
the only route for self-employed borrowers," he says.
High street banks, keen to cut their administration costs, are adopting a
process called "streamlined underwriting" or "fast-tracking" on standard loans.
Lenders, such as Halifax, Woolwich, Abbey, Nationwide Building Society, Northern
Rock, Bristol & West, Portman and Standard Life Bank, all offer fast-track
loans.
When a loan is fast-tracked, borrowers with a good credit history and a deposit
of at least 25 per cent do not automatically have to produce proof of income,
although a lender still reserves the right to ask for it.
This means that the borrower will qualify for the full range of deals offered by
the lender, rather than having the restricted choice and slightly higher rates
for the privilege of self-certification.
"We look at each case on an individual basis," says Fincham. "With an existing
customer we may not need proof of income for the last three months or three
years if you are self-employed. We would also take into account your
relationship with the bank and whether you had a good credit score."
CASE STUDY
Hannah and Mark Dennis decided to swap their two-bedroom flat in Willesden
Green, north west London for a three-bedroom house in Ealing, west London,
earlier this year. "As well as needing more space for our daughter Laila, who is
almost two, we wanted to be nearer my parents who help out with childcare," says
Hannah, 33, a researcher. The couple sold their ground-floor flat for £303,000,
which left them with a profit of £90,000. They kept back £20,000 to cover legal
costs, stamp duty and renovations to their new home and put down £70,000 as a
deposit. This left them needing a loan of £280,000 to make up the £350,000
asking price.
As Mark, 32, left his job as an estate agent 18 months previously to set up his
own business as a wine broker, the couple assumed they would have difficulty
obtaining a standard mortgage. "Even though Mark's business has taken off really
well and we could easily afford the repayments if they were spread over a longer
period of 35 years, we couldn't provide the documentation most banks ask for,"
says Hannah.
On the advice of a mortgage broker they opted for an interest-only mortage with
Abbey fixed for two years at 4.84 per cent. The application was fast-tracked and
couple were able to get a decision within two weeks. “The bank was fantastic,"
says Hannah. "All we had to provide was a statement of our income and a building
society pass book with details of our savings. The mortgage was approved really
quickly and the repayments work out at around £1,100 a month."
She adds:"When we had the property valued, the surveyor said it was worth
£10,000 more than we paid for it. It needed a complete renovation so the money
we have spent on putting a new kitchen and bathroom should increase the value
even more."
The couple intend to switch to a standard 25-year repayment mortgage in a few
years time when the business becomes more established. 'We'll probably opt for a
flexible mortgage which will allow us to make overpayments to make up for paying
less now," says Hannah.
This article has appeared in Mortgage Magazine which is available in all good
newsagents. Copyright MSM International Ltd
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