Self cert deals
Lenders don’t tend to like it if you can’t prove your income
when applying for a
mortgage. But
a range of specialist deals is available, and more and more lenders are starting
to offer them If you’re your own your boss there’s a potential price you’ll pay
for your independent streak: a hard time securing a mortgage. If you have more
than two years' worth of accounts, then you should be able to apply for a
standard mortgage. If not, you might need to self-certify to secure your home
loan. These deals were originally designed for self-employed people without
three years of accounts as, traditionally, they would have been regarded as a
risk by the lender. Most businesses that fail do so within the first two years
of trading, for example.
With a self-certification deal
you will state what your income is without having to provide documentary
evidence in the form of pay slips.
GREEN LIGHT
You can get these deals with specialist lenders and with some high street
lenders. The catch is that you will have to pay a larger deposit -typically
10-25 per cent and contend with slightly higher interest rates -generally 0.25
per cent more than high street rates for standard borrowers. You can also expect
to pay higher fees than you would if you were a more conventional customer with
an annual income that can be easily proved. If you want to self-certify with a
specialist lender they will take you on as a ‘non-status’ borrower. To qualify
they will be more concerned about affordability than your estimated income.
Customers with GMAC, for example, don’t have to state their income, but their
job title and the amount they want to borrow. They are then assessed on their
credit history and job title - not on the income they say they earn. With iGroup
you’ll declare your income. Depending on the amount you have declared you then
sign a letter confirming the nature of your business, provide evidence of your
business or a letter from your accountant.
Things are slightly different with the self-certification
deals with high street lenders Bank of Scotland, Bristol and West and the Bank
of Ireland. Here, when you apply for your mortgage they will ask you to state an
estimate of your yearly income which will checked by the lender. A spokesperson
for Bristol and West explains: “Self certification customers certify what it is
that they earn, without having to provide bank statements, accountants’ letters
and employer references. Lenders then typically conduct verification checks by
looking at someone's credit history to establish that what they say they earn is
realistic. Income multiples are then worked out as normal.” You’ll need a
minimum 10 per cent deposit with the Bristol and West, but you’ll benefit from
more competitive interest rate if you can rustle up more. With a 25 per cent
deposit you’ll pay 5.15 per cent interest on a three rate fixed deal compared to
6.19 per cent with a 10 per cent deposit. You’ll also pay more fees with a
lesser deposit amount. Borrowers, as they are self-employed, also like the
option of taking a flexible option. “This is good because if your business
fluctuates you can overpay during the good times then during the leaner periods
you can underpay or take a payment holiday,” continues the spokesperson.
Mainstream
Historically, self-certification deals were only available through specialist
lenders. While these firms are reputable companies working within the market,
many borrowers were a bit unsure about them simply because they aren’t household
names.
But now some forward thinking traditional lenders are making the move into the
market. One such is Cheshire Building Society, which began offering
self-certification at the beginning of last year. “We could see that the
self-employed had been excluded from competitive products by traditional lenders
like ourselves,” says Nicky Cardwell from the society. “We could see a sector
that we couldn’t help and we wanted to.” The lenders that do steer clear of
self-certification do so for two reasons. Firstly, it’s seen as a slightly
higher risk, and if the lender is a mutual it has to think about its other
borrowers and savers who will pay the penalty for any defaults. Secondly, the
applications are treated differently.
“Obviously, the self-employed are not particularly different people, they just
have trouble proving their income,” explains Cardwell. “From an underwriting
point of view our teams will spend a little longer looking at the application
and doing so in a slightly different way - for example they’ll look to see what
jobs they have and whether the income they are stating matches the occupation, a
common sense test.
ALTERNATIVES
But if you don’t have three years worth of accounts, don’t assume your only
options to get a mortgage lie with a self-certification deal. David Hollingworth
from mortgage broker London and County points out: “Lenders are becoming far
more flexible and realise that just because you are self-employed and don’t have
three years of accounts that you won’t be a good bet for a mortgage.” He says
that banks and building societies are using more sophisticated credit scoring
systems
to weigh up the risk you pose them. A large amount of cash to use as a down
payment also helps. If you have as much as a 25 per cent deposit then you could
walk into a high street lender and choose from its entire range of more
competitive products through a ‘Fast Track’ scheme. Here, you will be asked to
confirm three years of your net profits which, because the aim of Fast Track is
to be quick, won’t be verified by the lender. The beauty of these deals is that
they allow you to choose from its entire range of products including discounted
interest rates. And the fact you’ve scraped a 25 per cent deposit together means
many fees will be waved. Unlike borrowers with lesser deposits, for example, you
won’t be charged a Mortgage Indemnity Guarantee (MIG) which, depending on the
size of your mortgage, can add up to four figures. Hollingworth adds: “Self
employed borrowers shouldn’t assume they’ll have to self-certify. Lenders are
becoming more enlightened so its well worth going to the high street and talking
to them.” Banks and building societies are arguably becoming more enlightened
because of the changing working patterns of our globalised and flexible
workforce. Roy Bookman, for example, from internet-based
broker
Mortgage Beaters says: “We get very widespread enquiries. Some are from people
starting up business who tend to have low basic incomes but high dividends. Some
are sole traders who don’t want their affairs disclosed, whilst others are from
people who often have two jobs, one
employed the other self-employed.”
It’s estimated that three million people in the UK, or 10 per cent of the
working population, are self employed. Accountants, hairdressers, builders, IT
whiz kids and business entrepreneurs make up a fraction. Millions more work as
contract staff, earn their crust through investments or have more than one
income. This includes people who work and have pensions, divorcees with
maintenance payments and employees who drive taxis, work behind bars or are
bouncers by night. Self-certification is also a particular blessing for people
who rely on big bonuses and commissions. If they apply for a traditional
mortgage often just their salary and half of their their bonus will be taken
into account. With
self-cert they can state their true income and increase their borrowing
power.
RUMPUS
Self-certification deals and Fast Track schemes are controversial, though. There
is plenty of evidence to suggest that people with normal nine to five jobs who
can prove their incomes are, too, increasing their borrowing power by lying
about what they earn. This worries many. “There is unscrupulous use of it by
both borrowers and by advisers putting down a higher incomes so that they have
access to more lending,” says Hollingworth. “There’s no reason why people with
only one job and who can prove their income should be using self-certification.”
If you are a first time buyer struggling to get on the property ladder and tempted to
overstate your income with a self-certification deal remember that as well it
being illegal, you could run the risk of being unable to pay your mortgage
because you’ve stretched your borrowing so far. Hollingworth says: “People who
are committing mortgage fraud run the risk that as interest rates continue to
rise their payments will increase and they won’t be able to afford their monthly
mortgage commitment.” Lenders and commentators have claimed that
self-certification and fast track deals are irresponsible: an accident waiting
to happen that could lead to widespread mis-selling allegations. The chief
executive of Yorkshire Building Society, for example, has blamed lenders for not
providing enough advice to borrowers about how they could become unstuck with
these deals and wants them banned.
The Council of Mortgage Lenders, meanwhile, points out that self-certification
deals are a lifeline for many legitimate borrowers. A spokesperson says: “They
have emerged in response to changing patterns of employment and they fill a
useful gap in the market for some type of borrowers - whether in jobs or the
self employed - who might otherwise be denied access to homeownership.”
Tips
-those who can’t prove their income the usual way include the self-employed,
contract and freelance workers, who don’t have three years worth of accounts,
people with two jobs, people who rely on big bonuses and funds from investments,
pensions and maintenance payments
-the definition of income can be very flexible but lying on the application form
is mortgage fraud
-deliberately inflating your income could mean you could fail to keep up with
repayments
-deposits, interest rates and fees are higher with
self-certification mortgages
-if you are self-employed don’t assume a self-certification deal is your only
option -a good financial adviser or broker will often be able to obtain
mainstream rates for the self-employed
-flexible mortgages are useful for the self-employed as they allow you to
overpay, underpay and take payment holidays should you desire
-the golden rule, as with any borrower, is to ensure that the mortgage payments
are going to be affordable
This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd
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