The self-certification market has seen considerable growth over the past few years as lenders have adapted and innovated their product offerings to meet the changing needs of borrowers. From humble beginnings, when self-cert was only designed to meet the needs of the self-employed, it has evolved and now caters for a growing employed sector. As has already been mentioned, recent research found self-cert is the largest of the specialist sectors and it is one of the product areas which most intermediaries expect to see the biggest increase in business in the future. So as the market enters maturity and with regulation on the horizon, what does the future hold for self-cert?
On current trends it does appear market forces will continue to drive the market onwards and upwards. There are many reasons for this, but the two main drivers exist within the social and technological environment. As the market continues to grow, the gap between mainstream and self-certification products continues to narrow, to a point where there is little difference between the two other than price.
Society has changed and these changes have brought about a growing demand for self-cert mortgages. We have seen changes in the workplace regarding contracts and, based on current labour force survey trends, this is due to growth in the self-employed arena which is expected to continue. For these clients, it has been well documented that it is difficult to prove their true income – which is why self-cert originated in the first place. And we also know that accountants use their professional skills to reduce their client’s income for legitimate tax purposes, affecting the level of mortgage they can apply for. This is why the self-employed prefer the self-cert route because they do not have to prove their income, which would otherwise have to be proved via their accounts which would show a lower figure than they state on the application form. So as the self-employed sector has grown, we have seen a parallel increase in self-cert.
It is accepted that the self-employed find it difficult to prove their total income. But another point that is sometimes overlooked is that many self-employed clients do not actually know what income to declare on the application form, often due to it being variable and/or complex. To give an example, take a self-employed architect who set up business two and a half years ago. On the application form does he state his earnings from the first year, last year, this year’s predictions or an average of the three? But his earnings may well be increasing as his business grows, so will any income shown really reflect his true level of affordability?
However, calculating and proving an income can be just as problematic for employed clients too, which is why we have seen an increase in the number of employed self-cert mortgages in the past few years. For example, at GMAC RFC, 47% of completions so far in 2003 have been to the employed. But why is this? First, employment patterns have changed. A job for life is no more and lenders no longer see the self-employed as a greater lending risk than the employed, which is why the product was extended to cater for this group. As lenders, we have seen an increase in the number of professions that contain a high element of commission or overtime, that can vary, and their income will not always be truly reflected in their last three months payslips. Yes, the P60 can show total earnings but, depending on when the mortgage application is made, that figure might be out of date.
Many employed clients now have multiple sources of income too – such as trust funds, investments, a second job, pensions and rental income. Some of these fall into the classification ‘high net worth’ and have complex financial affairs. For these clients, it is not just hard to prove their income, it can also be very difficult to calculate an income. Again, this is why stating an income that cannot be proved is not always necessarily the best way of doing things.
So, calculating the income that needs to be shows on an application form is not always straightforward. Many intermediaries are becoming concerned about stating the income of their clients on self-cert application forms post-regulation. This is because they believe it could be misinterpreted they have stated an income that is untrue. To counter this, more lenders may not request any evidence of income, which could still work alongside the traditional self-cert route.
The growth of self-cert can also be attributed to the simplicity of the product, because it should normally complete much quicker as there is less documentation to gather and submit. This is the reason it has also begun to appeal to those clients, self-employed or employed, who may be able to prove their income but it would take a lot of their time to gather the information together.
For many clients it is hard enough striking the work/life balance anyway, so they want a hassle-free mortgage application process and self-cert goes some way to meeting this need. And, as the gap between mainstream and self-cert has narrowed, so too have the interest rates and clients can now access some competitive rates.
Another factor stimulating the market growth has been many clients choose the self-cert route because they can obtain the mortgage they require without actually earning the income that would normally be required if traditional income multipliers had been applied. In other words, they are finding ways to borrow the money they require and, more importantly, feel is affordable – rather than being told by the lender how much they can afford.
Of course no-one wants to see borrowers overstretch themselves and see a repeat of the late 1980s and early 1990s, particularly the client themselves. Most lenders believe in treating people as adults, as clients should be mature enough to know what level of mortgage repayment they can afford each month, based on their own income and expenditure. The role of the intermediary is key, as they need to work with the client to ensure the loan is not only affordable today, but also in the future when the interest rate climate may be different.
While we have seen social changes, there have also been parallel changes in technology that have helped lenders keep pace with these changes and meet demand. Lenders have become far more adept at assessing and understanding the risks of self-cert lending, which is why more lenders have entered the market and driven down prices. The growing use and increasing sophistication of credit scoring systems has helped the market to evolve and will continue to do so. Technology allows lenders to assess a borrower’s credit worthiness via other means, such as electronic scoring systems and CAIS data, which can calculate the applicant’s ability to maintain the mortgage repayments.
With this technological evolution, more lenders will devise more innovative ways of assessing affordability, rather than just relying on an income declaration, and this will cause the growth of automated decisioning and risk assessment systems (as opposed to online applications in principle) that will reshape the market and mean that, for many clients, stating an income will be totally unnecessary.
With these social and technological changes we will see further growth and further developments. Already we see mainstream lenders offering mainstream rates using self-cert techniques. So it will not be long before mainstream and self-cert are almost completely merged and there is no differential between the two, other than price.
This will mean lenders and intermediaries will have to rethink how they segment their databases, moving away from a statistical (or demographic) basis to re-segmenting these sectors based on actual needs, with self-cert still being for adults only.
Demand for self-cert will increase as incomes are based more on commission, bonuses, overtime and investments.
Lenders appear more willing to accept loan’s are affordable, even if they are outside usual income multiples.
Technology is making affordability assessments more flexible, making income more of an irrelevance.