The self-certification mortgage market is growing faster than mainstream mortgages due to the rising number of self-employed people struggling to meet traditional lending requirements. But as house prices soar, some people are being tempted to use self-cert mortgages to exaggerate their income in order to buy the property they want.
What are these mortgages and how do they work?
Self-certification mortgages put the onus on borrowers to say how much they earn and how they can afford to pay the loan back. Borrowers have to sign legally binding documents declaring their earnings but they do not have to prove their earning levels on paper.
Who are they aimed at?
Self-certification loans have been designed for borrowers who would struggle to prove their income. This includes people on short-term contracts and self-employed people with only a couple of years of accounts. One of the attractions of a self-cert mortgage is that it can enable self-employed and employed people to apply for larger loans than they would get if they provided proof of income and received the standard income multiples offered by most mainstream lenders.
They are also useful for people such as City workers who receive large bonuses. Say, you earn a basic salary of £50,000 and receive a further £50,000 in annual bonuses. Most lenders would take only half the bonus into account and would therefore base your mortgage on an income of £75,000. A self-cert deal could allow you to calculate your mortgage on an income of £100,000.
Who offers them?
Lenders have been quick to take advantage of the introduction of these loans. In the past couple of years they have flocked to the self-certification market, with almost 30 per cent of all UK mortgage lenders now offering at least one self-certification product. Accord, Bank of Scotland, The Mortgage Business and UCB Home Loans all offer a self-certification loan as does Alliance & Leicester and Yorkshire building society. Co- operative Bank recently pulled out of the market following repeatedly negative press about the loans.
What are the rates?
The rates on self-cert deals are typically between one and half a percentage point higher than typical standard loans. For example, the cheapest two-year fix among self-cert schemes is 4.99 per cent from UCB Home Loans, according to Moneyfacts, the data provider. By contrast Portman is offering a standard (non self-cert) two-year fix at 4.59 per cent.
Advisers tend to recommend people opting for self-cert mortgages go for a short-term deal of two or maybe three years. Once the fixed or discounted term has come to an end, you may meet standard lending criteria and be able to switch to a lower rate.
And what about a deposit?
You will also need a bigger deposit if you choose a self-cert loan. The most that lenders tend to advance is 85 per cent of the property’s value.
What about the negative press about them?
Self-certification loans recently came under the spotlight amid concerns that some advisers were encouraging people to lie about how much they earn in order to get a bigger loan. A BBC documentary last year alleged that some mortgage advisers were recommending that first-time buyers struggling to get on to the property ladder should opt for self-cert mortgages.
But surely they are regulated by the FSA?
Yes, they are regulated and the FSA recently concluded that the necessary safeguards were in place to prevent widespread abuse. However, despite some income checks by credit reference agencies, there are inevitably some applications that contain false income details.
Do they have a place in the mortgage market?
The growth in self-cert mortgages has received a mixed response, with some saying the product meets a real need and others concerned that these mortgages could be misused by consumers. But with more self-employed people than ever, the need for self-cert mortgages has never been greater. Self-certification is necessary in today’s market because many well-off but self- employed people would not be able to get a mortgage any other way.
What should borrowers be aware of?
Although income stretching is not a huge problem when interest rates and unemployment remain low, the market could implode if economic conditions change. Consumers need to understand the implications of taking on large loans at a time when interest rates could rise and consider how they would cope if their mortgage payments rose.
Are there any alternatives to self-certification?
Some lenders, including Halifax, Woolwich, Abbey, Nationwide, Northern Rock, Bristol & West, Portman and Standard Life Bank, use a process called fast-tracking for standard loans if the applicant has a sizeable deposit and is not a first-time buyer. You normally need at least a 25 per cent deposit, although Northern Rock requires only 20 per cent. Fast-tracking is not self-certification, though applicants do not have to provide proof of income.
