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Self-certification Mortgage DIY
Not all DIY this New Year will involve a hammer and chisel. Laura Brady looks at
‘doing it yourself’ with a self-certification mortgage…
To call self-certification a ‘grey area’ of the
mortgage
market is putting it lightly. Few people really know what self-certifying means
these days, let alone who can do it and how. The landscape of the mortgage
market is also forever changing due to factors such as regulation, customer
demand and competition between lenders. But if
self-certification is
something you are considering for next year here is a snapshot of what to
expect...
What is self-certification?
True self-certification – or ‘self-cert’
for short – is basically when a mortgage lender will take your word for how much
you earn. Although no proof of salary will be required the lender will want
other securities in return.
Why would you self-certify?
Self-cert is primarily designed for self-employed borrowers who are often in
receipt of an irregular income. This means they are unable to declare a ‘fixed
salary’, which is required by most mainstream lenders to calculate how much you
can borrow. A self-cert mortgage allows the borrower to declare what they
consider to be their typical income. A self-proclaimed ‘true self-cert lender’
such as BM Solutions – the specialist lending arm of Halifax – will not require
proof of this declared income although it will still carry out ‘plausibility’
checks. Eyebrows will be raised, for example, if you estimate your income to be
£160,000 a year whilst giving your occupation as a shop assistant.
But it’s not just the self-employed that requires this type of loan, says Carla
Lavender at BM Solutions. “It could be that you receive income on top of your
salary that is not documented. For example if a large proportion of your
earnings are a result of commission or you receive considerable annual bonuses.
You could also be paid from more than one job.” Peter O’Donovan, mortgage
manager at Independent Financial Adviser (IFA), Bestinvest, adds: “Self-cert is
also popular among the semi-retired who receive an income from a pension. Or for
people who, for tax reasons, may not have declared their full earnings to their
accountant.”
What are the drawbacks of self-cert?
But you don’t get something for nothing and, as no income has to be proved, the
lender will want to mitigate its risk by other means. This means that you will
need a larger deposit – typically 15 per cent, opposed to around five per cent
in the mainstream market. However some lenders such as the mortgage works – part
of the Portman Building Society – now stretch to a 90 per cent Loan to Value
(LTV) with selected schemes, says O’Donovan.
The rate of interest payable on a self-cert mortgage is also slightly higher but
only by a margin of around 0.25 per cent. A competitive self-cert two-year fixed
rate mortgage for example is currently priced at 4.69 per cent (see current
deals). This compares to around 4.39 per cent for a standard loan. Watch out
also for more expensive arrangement fees, which can be charged as a percentage
of the amount borrowed. A fee of 1.5 per cent on an average size loan of
£175,000 will set you back a hefty £2,625 compared to a typical one-off fee of
£499 that you’d pay on the high street. Although an arrangement fee can usually
be added to the mortgage the benefits are short term as it will only attract
years of interest.
Due to their complexity, true self-cert deals are only available through a
mortgage intermediary (or broker). This could result in an additional fee of
around one per cent of the loan – on top of a deal that has already cost more.
The changing face of self-cert: It is also now more difficult to satisfy a
mortgage broker that you are a good proposition for a self-cert loan. This is
partly a result of the regulation of all mortgages by the Financial Services
Authority (FSA) back in November 2004. However, particular attention was paid to
the self-cert sector following an episode of The Money Programme shown the
previous year (October 2003). The programme exposed a handful of mortgage
advisers, as well as some estate agents, encouraging borrowers to grossly
overstate their income. This meant they could borrow a far greater mortgage,
which was not conducive to their true earnings.
As a result of the programme, the FSA launched an investigation into self-cert
lending and a clamp down was already in place before mortgage regulation began.
Getting a self-cert loan is now a far more regulatory procedure, says O’Donovan:
“Intermediary lenders such as the mortgage works and GMAC, used to offer deals
that did not require the applicant to declare any salary at all but these have
since been dropped. Other lenders have also stopped offering self-cert deals to
employed borrowers.”
Paul Banfield, partner of IFA, Best Advice Financial Planning, says: “There are
an increasing number of people who, for one reason or another, cannot prove
their income. However, some will take advantage and it’s pretty difficult for a
broker to know. If, for example, an applicant has described themselves as ‘an
office worker’ on a salary of £45,000, it’s suspicious but difficult to dispute.
That’s why we would always recommend looking at other loans before taking the
self-cert route.” If you are trying to get on the housing ladder for example
there are other less dangerous ways to boost your income such as shared
ownership schemes and guarantor mortgages, says Banfield.
Do I really need a self-cert loan?
Even if you are self-employed, you do not necessarily have to self-certify.
O’Donovan says: “Traditionally if you could produce three years’ of tax accounts
and bank statements, you could qualify for a mainstream mortgage but often now,
only a year is required. The most important factors are a borrower’s credit
score and the size of their deposit.”
If you are looking for a relatively small mortgage in relation to the value of
the property and have a healthy credit score (you can check yours for a minimal
fee by contacting one of the credit agencies below), it’s worth making the high
street your first port of call. Abbey for example will lend to low risk
self-employed applicants with less than three years’ worth of accounts. “If you
are a self-employed professional such as a lawyer and have a 25 per cent deposit
or more, we would only insist on one years’ documents,” says spokesperson, Joe
Wiggins. “The application would then qualify for ‘fast track’, which is similar
but not quite the same as true self-cert. We still reserve the right to check
the borrower’s salary.”
What self-cert deals are out there?
Before you make an appointment with an IFA, it’s worth familiarising yourself
with what’s available in the self-cert arena and the type of
mortgage that
could be most suitable for your circumstances.
If your income is erratic, and knowing what leaves your account each month would
offer welcome security, look at getting a fixed rate loan: BM Solutions is
offering a two-year fixed rate self-cert deal at 4.69 per cent in exchange for a
15 per cent deposit. However a 1.5 per cent arrangement fee is payable. If you
want to avoid the steep arrangement fee and pay a set £599 instead, you can take
a slightly higher two-year fix with the lender at 5.19 per cent, which is also
available up to 85 per cent LTV.
Interest rates are tipped to fall during the course of 2006 by as much as 0.75
per cent, according to experts at broker, John Charcol. So a tracker deal that
follows the Bank of England base rate by a given margin could be the way
forward: BM Solutions is offering a two-year tracker priced at 0.79 per cent
above Bank of England base rate (current payrate 5.29 per cent.) Available to 85
per cent LTV, it comes with £599 arrangement fee although the valuation fee is
refunded and there is £300 cashback payable on completion. The reversion rate
with all deals at BM Solutions is Bank Base plus 1.99 (current payrate 6.49 per
cent).
If you are looking for an initial low payment, as well as the chance to benefit
from potential cuts in interest rates, a self-cert discount deal could be your
best option: the mortgage works is offering a discount from its Standard
Variable Rate (priced at base rate plus 1.99 per cent) of 1.34 per cent, giving
a current payrate of 5.15 per cent for two years. The deal comes with a £595
arrangement fee and a 15 per cent deposit is required. Both self-employed and
employed applicants will be considered.
Where do I start?
Check your credit score:
Experian: www.experian.co.uk: 0800 656 9000
Equifax: www.equifax.co.uk: 0870 010 2091
This article has appeared in Mortgage Magazine which is available in all good
newsagents. Copyright MSM International Ltd
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