Who are self cert mortgages for
Payslips are key to getting a standard
mortgage, but
if you don’t have that proof, there are lenders ready and willing to take you
on. Ben Wilkie reports
Traditionally the last resort for borrowers who could
not get a mortgage any other way,
self-certification mortgages used to come complete with high interest rates
and expensive arrangement fees.
But changing work and lifestyle patterns, and increased competition amongst
lenders, mean that today the self-cert sector is heading towards the mainstream.
Who are self-cert mortgages
for?
In the past, groups of consumers such as the self-employed and people with
multiple income streams were excluded from the
mortgage
market because they could not fulfil conventional criteria for verifying their
income. Self-cert was introduced more than a decade ago to combat this but
started out with a rather negative image, being widely regarded as only suitable
for clients rejected by mainstream lenders or with poor credit ratings.
But since the late 1990s the market has been growing and has managed to shake
off its poor image. According to Datamonitor, the self-cert sector has grown at
27.7 per cent per year on average over the last five years, outstripping growth
in the rest of the mortgage market. A true self-certifying mortgage is one where
the borrower does not have to provide documentary proof of income. Instead they
tell the lender what they expect to earn and the lender runs a series of checks
to ensure the borrower can afford the mortgage and be able to cope with future
interest rate rises.
Specialist lenders such as UCB Home Loans, part of the Nationwide group, have
led the way in developing products to meet the needs of a wider range of
borrowers and enable more people to become homeowners.
A spokesperson from UCB says: “The self-cert sector is geared towards helping
people who are not able to provide the type of employment references or audited
accounts that conventional mortgage lenders usually require.
"People who fall into this category typically include the self-employed, company
directors, contract workers, people on variable earnings, and those who have
more than one job. The total size of the market is around 10 million people, of
whom around three million are self-employed.”
Changing lifestyles have helped drive the growth of self-cert mortgages. More
people are self-employed, while others have an unpredictable income because they
are on short-term contracts or are on low basic incomes with high levels of
commission.
How does the application process differ?
When a customer applies for a self-cert mortgage the lender will not ask for
bank statements or payslips to prove income. But they will still require proof
of identity such as a passport and may do a simple check to make sure they
company you work for or own exists.
UCB says: “Borrowers tend to find that the application process is much smoother
and faster than they might have expected. This is primarily because our teams of
mortgage specialists and underwriters are 100 per cent focused on the self-cert
sector, rather than concentrating on the kind of conventional lending that is
dealt with by Nationwide.” Ray Boulger at mortgage broker John Charcol says
lenders have become more efficient at sharing and communicating data on
potential borrowers, making the process quicker. “No longer is the burden of
proof of income laid heavily on the borrower – instead, if a borrower gets a
clean bill of financial health from a credit reference agency, then they can, in
the majority of cases, get a decision on the spot."
However, affordability and continuing ability to pay are key concerns. Self-cert
lenders will ask you to state your income and then apply the normal income
multiple and affordability checks. So if a lender only lends four times
someone’s income, it will not lend you any more because you are self-certifying.
Instead of relying on the verification of income by employers, issues are
addressed in different ways. One important measure is the “stress testing” of
loans against the possibility of interest rate rises. Credit scoring is used too
and provides an effective means of helping to underwrite mortgage applications.
Can borrowers simply lie to get a bigger loan?
The self-cert market became the centre of some controversy in 2004 when the
BBC’s Money Programme claimed too few checks were made by lenders to verify
applications and so brokers were encouraging people to lie about their income so
they could get a bigger mortgage.
The effect of the programme was twofold. A subsequent investigation by the
Financial Services Authority found that controls were generally adequate and
such instances were few and far between, but lenders and brokers tightened up
their acts all the same. The second effect was more people became aware of what
selfcert was and how it could help them. Sales increased slightly in the months
after the programme was screened.
James Cotton of broker London & Country says: “If you lie on the application it
could invalidate the terms of the mortgage offer. If they find out during the
process the lender could refuse to lend you the money. It’s basically fraud as
you will sign a declaration to say the information you have given is true to the
best of your knowledge.”
But if you lie and get away with it you may later find you have over-stretched
yourself financially. Like with any mortgage, if you cannot keep up with the
repayments your home may be at risk.
The temptation for borrowers is obvious. If lenders offer, say, four times the
income of the borrower then someone on a £30,000 salary could get £120,000; if
the borrower exaggerates and says the salary is £50,000, the loan could be
£200,000, meaning the borrower could afford a better property.
“The bottom line is don’t lie because you can get caught out,” says Cotton. “You
may think it’s the only way to get a house but it will cause you serious
problems down the line. The reason for affordability rules is to make sure you
don’t take on more debt than you can afford.”
Who are the main players?
Traditionally self-cert mortgages were seen as high risk by lenders and they put
their rates up accordingly. But things are changing and self-cert is heading
towards being a mainstream product with competitive rates. If you shop around
you will find that many self-cert mortgages are attractively priced and there is
a wide variety of products to suit customers’ needs.
Many of the mainstream lenders in the UK, such as Abbey and the Halifax, now
offer all of their rates on a self-cert basis up to 75 per cent loan-to-value,
although they prefer to use a different term such as fast track or streamlined
underwriting. Fast track loans are similar to self-cert in that borrowers are
not required to prove their income; the main difference, however, is lenders
reserve the right to ask for proof if they have any reason to doubt what you are
telling them.
The true self-cert market is dominated by specialist arms of more familiar
parent companies. Platform, UCB Home Loans and BM Solutions are owned by
Britannia Building Society, Nationwide and HBOS respectively.
It’s possible, for example, to get a three-year fixed rate with Mortgage
Express, a subsidiary of Bradford & Bingley, at 4.99 per cent with a maximum LTV
of 90 per cent. Variable rates at the same figure are available with BM
Solutions, although the LTV is lower at 85 per cent.
Jonathan Cornell of Hamptons International Mortgages says interest rates on
selfcert deals are only a bit higher than on mainstream loans. “Competition
between self-cert lenders intensified in the last couple of years and greater
competition brings definite benefit to consumers.
However, most lenders will want a customer to put down a bigger deposit if they
are self-certifying. “It varies from lender to lender,” says Cornell, “but the
majority would want a 15 per cent deposit. The same lenders offer 95 per cent
loans to mainstream borrowers so self-cert customers do have to put in more
money. If there’s no proof of income there is a greater risk to the lender.”
Despite being deemed a higher risk there is no evidence to suggest that
self-certifying borrower fall into arrears more often than mainstream customers.
And the larger deposits they are required to put down mean they have more to
lose if they do.
CASE STUDY
Kevin Blackshaw, 38, is a waiter from Manchester. He recently remortgaged his
three-bed semi-detached house with UCB Home Loans. “I had a mortgage with the
Nationwide with my partner and we split up, so I went to the Nationwide to see
what I could do. “Because I’m a waiter half my income is from tips and so I
couldn’t prove my income. The advisor at the Nationwide suggested I go to UCB
Home Loans. “It was quite straightforward because they already had a lot of my
details as an existing Nationwide customer. I didn’t have to prove my income. “I
got a five-year fix at 5.6 per cent which is not much higher than before. I was
coming to the end of a two-year fix at 3.75 per cent but I got that when rates
were low and it would be going up at the end of the fixed period anyway.”
This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd
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