The myth that self-cert mortgages are only for the self-employed is one that has been well and truly shattered and it is this that goes some way to explaining why some experts are now citing self-cert as the fastest-growing sector in the UK mortgage market.
Andrew Frankish, a director at Mortgage Talk, says his firm’s self-cert business has rocketed over the past 12 months. “We saw in the region of 100% growth in the past year – it is like self-cert has become a name for a lack of evidence.”
Lenders, brokers and the more astute borrowers have recognised it is not just those who run their own business that are tempted to self certify. In fact BM Solutions now estimates 50% of its new self-cert borrowers are employed.
“Self-cert is our fastest-growing area – there has been pent-up demand from borrowers for a long time,” explains Andrew Miles, senior product manager at BM Solutions.
So how big is the self-cert market and is it anywhere close to realising its potential? Research analyst, Datamonitor, has reported average growth of nearly 28% a year for the past five years – with the most spectacular growth occuring in the last two. However, it is difficult to put a finger on the market’s exact size, or indeed its growth rate, because what one lender calls self-cert differs to the next.
David Bitner, head of product operations at The Marketplace, explains: “It is hard to measure growth in this sector. The market is made up of specialists in self-cert lending who have been in the market for some time and mainstream lenders who do not call their products self-cert, but have improved their processes so they do not check income below 75% LTV.”
The market can be broken down into three distinct types of lending, according to Bitner. “First are the lenders that require no income confirmation and no income declaration on the application, for example, Sun Bank, GMAC RFC and Mortgage Express. Then there is ‘true’ self cert. Here lenders will want an income declaration which they do not have the right to check.” UCB, BM Solutions and TMB are lenders that fall into this category.
“Third is the mainstream lender who will not check the income [below 75%], but retains the right to do so, if it has concerns,” he adds. Lenders in this group include Halifax and NatWest, both of which have entered the market in the past year.
But while it may be difficult to quantify the self-cert market, nobody is in any doubt of its great growth potential. The entrance of the likes of Halifax into what was previously a specialist area should be enough to prove this. However, by looking at the number of people who are not employed in the ‘traditional’ way it is impossible to downplay the potential for self cert.
Charles Reed, managing director of UCB explains: “There are between 3.2 million and 3.3 million self-employed people in the UK, but when you embrace the number of contractors, part-timers and those with more than one job the figure escalates to somewhere in the region of 10 million, all of which would come under the self-cert category.”
Subsequently, it is very difficult to paint a picture of the ‘typical’ self-cert borrower. According to Sally Laker, managing director of Mortgage Intelligence, changing work and income patterns all contribute towards an increased need for the less rigid lending criteria used by lenders in the self-cert market.
Laker says: “People are now very likely to have more than one income stream.” Many workers, for example, might have more than one job. Then, there is the buy-to-let aspect. “In 1997 and 1998 the market was just beginning to grow and people had one or two properties. However, of those who started back then, many now have in the region of five to 10 properties,” Laker adds. With substantial rental payments coming into their bank account each month, landlords will want this source of revenue to be considered when purchasing their own home.
Room at the top
At the top end of the scale, there are also many wealthy individuals who could benefit from self certification – the large earners who buy big properties with a mortgage to match.
“They can afford the loan,” says Laker, “It is just often too much hassle to document their income. For example, they might have their main income, plus shares, a large bonus structure and investment income.”
In such cases convenience will often be a bigger priority than rate – many borrowers in this situation would rather pay a premium to bypass lengthy income checks so their application is processed as smoothly and as quickly as possible.
While the numbers of employed people that are taking out self-cert loans has shot up, the old ‘bread and butter’ borrowers – the self-employed – should not be ignored in brokers’ marketing campaigns and it pays to keep abreast of the changing dynamics within this section of the workforce.
According to the Office of National Statistics’ Labour Force Survey, 11% of the working population was self-employed in spring 2002, a proportion that has remained relatively stable over the past 20 years.
A quarter of this group were women, despite women accounting for almost 50% of the employed workforce. A look at the type of occupations where self-employment flourishes goes some way in explaining this trend. Self-employment is most prevalent within the skilled trades, with almost a third of workers work for themselves – an area clearly dominated by men. This is way ahead of the next occupation on the list, senior managers and officials where only 14% are likely to be self-employed. As far as industries are concerned self-employment is most common in construction, followed by real estate and rental activities and the wholesale, retail and motor trades (see table 2).
Graph 1 meanwhile, illustrates at which ages individuals are most likely to be self-employed. As one would expect, it seems people gather experience and finance while employed and are only like to go it alone once they are over 30, with rates of self-employment much higher in the older age groups.
Rates of self-employment also vary between the regions – rates are highest in the capital at 13%, with the South East and East also above average as graph two demonstrates. Further north self-employment falls to 9% in Scotland and 6% in the North East.
People from certain ethnic backgrounds are also more likely to become self-employed. More than one in five Chinese and Pakistani workers are self-employed, compared with one in ten for people of white origin. Even fewer black Africans and West Indians have opted for self-employment.
This research, coupled with an insight into the changing demographics of the UK labour force – the fact that people no longer settle into a job for life – demonstrates the sheer diversity and scope of the self-cert market.
Fortunately lenders have responded to this need and the choice of products is better than ever. As more lenders enter the fray, rates and terms are becoming increasingly competitive. MIGs are not a problem – especially as most loans are low LTV, and flexibility, is readily available to the self-employed and contract workers who might have an irregular income.
Frankish points out the key change to products over the past 12 months: “We have seen an increase in LTV,” he says. “Mortgage Express is now lending at 90%.” A controversial move, according to some, but there is no doubt that it will open the market up even further.
Rates are also on the way down, says Bitner. “The product has become considerably cheaper than it was five years ago. Typically you would pay 1%-1.5% more, but today if you borrow from Halifax you get a normal high-street deal. Specialists will be more expensive but that is usually because the risk is greater, for example, if the LTV is higher,” he says.
Unfortunately, in a rapidly-expanding market where criteria have been relaxed, some in the industry have begun to question whether it is open to abuse – allowing borrowers to burden themselves with a debt they may not be able to handle. And, even though borrowers can already increase their borrowing potential by going self-cert, there is concern that by taking borrowers at their word, lenders may be inviting them to overstate their income. “I am absolutely positive this goes on,” says Bitner. “People may be economical with the truth to get the best deals.”
In response, the FSA has proposed making self-cert mortgages only available to the self-employed. This is worrying and marks a real misunderstanding of the role played by self-cert in today’s mortgage market. It is to be hoped the regulator can work with the mortgage industry to find a solution that ensures the market continues to grow – safely and responsibly.