Self-certification mortgages, which do not require proof of a borrower’s earnings, have almost vanished from the market as banks no longer want to lend to customers who have no regular or reliable salaries.
Brokers report that just two providers are still offering these types of loans – The Mortgage Works, the specialist lending arm of Nationwide, and Platform, a division of Britannia. BM Solutions and Bank of Scotland, the HBOS brands that are now part of the Lloyds Banking Group, withdrew from the market last week.
Self-certification mortgages had been popular with self-employed people whose income may fluctuate. They also provided a way for employed people with additional income to make sure their total earnings were taken into account when applying for a loan.
Self-certification mortgages allow borrowers to declare their annual earnings without having to back them up formally with accounts. Lenders would still make credit checks on these customers and would typically ask for details of their accountants, but would not ask for further evidence of their income.
Banks have since pulled away from these mortgages as it became clear that some borrowers were inflating their income in order to take out larger loans. They fear that these borrowers may now struggle to keep up their repayments.
“The self-certification market looks distinctly precarious,” said David Hollingworth at London & Country Mortgages, the broker. “The self-employed will certainly have more hoops to jump through in order to secure a new mortgage.”
The lenders that are still offering self-certification loans have tight criteria and high rates. The Mortgage Works will only lend up to 65 per cent of the property value on self-certification loans. Its two-year fixed rates are around 5.39 per cent with arrangement fees of 2.5 per cent. Platform will lend up to 75 per cent loan-to-value but its two-year fixed rates start at 7.19 per cent with a fee of £1,995.
The withdrawal of BM Solutions and Bank of Scotland from the self-certification market followed similar moves by other lenders in recent months. Lloyds said that 20 lenders had pulled out of this area in the past year and it was unable to write the business that had been left behind.
Self-employed borrowers can still take out mainstream mortgages, which are likely to have cheaper rates, but brokers say they may need to provide up to three years’ worth of accounts to qualify. Some lenders may be more flexible if borrowers have large deposits. Even so, a significant number of borrowers are likely to be blocked out of the market, especially if their business is in the early stages and does not have strong profit figures.
Lenders are also clamping down on the self-employed who apply for mainstream mortgage deals. While, a few years ago, they may have asked for earnings details for the past three years and been willing to take the highest of the three, some lenders are now calculating loans on the lowest figure.
Lenders’ reluctance to offer self-certification mortgages is part of a broader move away from specialist lending. Many small lenders that set up to offer these loans – as well as buy-to-let and sub-prime loans – have collapsed as they have been unable to secure new funding.
BM Solutions also announced that it would no longer provide “near prime” mortgages, which would have been offered to customers with tarnished credit records. Customers with any kind of blemish on their payment record may find they cannot secure a new loan.
At the same time, the lender is introducing restrictions on buy-to-let lending. Investors who want a mortgage for a new-build property will now only be able to borrow 65 per cent of its value, rather than 75 per cent previously, and they will only be able to borrow on a portfolio of up to nine properties.
