Self-certification has traditionally been the realm of specialist lenders. But with a growing percentage of society falling into the sector through self-employment, contract work or multiple employment, mainstream lenders are also trying to get a piece of the action. However, moving into this risky sector is not as easy as it seems and many new players are taking a cautious approach.
This has resulted in an array of different criteria being set out by lenders in order to cushion possible losses. With definitions of self-cert varying from lender to lender, borrowers need to seek professional advice more than ever before. Advisers therefore need to be aware of the varying definitions currently in use. But first, let us look at some of the reasons why so many lenders are flocking to the market.
‘Three or four years ago, self-cert was regarded as the domain of smaller specialist lenders. But with more people entering the market, it signifies the growing number of people who now fall into this category,’ says Charles Reed, managing director of UCB Home Loans.
According to Eddie Smith, director of business development at specialist lender Verso, there are also tempting profits to be made. ‘It all comes down to the margins that can be made. Mainstream lenders have realised that specialist lenders such as ourselves have access to a huge market. There have definitely been some major changes over the last few years and more lenders are trying to cash in. A growing proportion of borrowers ‘ around 35 to 40% ‘ are involved in self-employed or varied work, so more lenders are adapting to fulfil their needs,’ he says.
Reading the small print
Although most lenders have attempted to dip their toes in the market, mainstream players tend to have tighter criteria, requiring more evidence to back up applications and offering lower LTVs. And as Reed says, some of the newer offerings may not be suitable for all self-cert cases. ‘People really do have to read the small print as criteria does vary between lenders. There are numerous definitions of self-cert circulating at the moment, some of which require much more evidence from the applicant,’ he says.
Nationwide gives self-employed customers access to its entire product range, but requires extensive supporting documentation to validate income. For loans under £200,000, an accountant’s certificate is required and for clients wishing to borrow above this amount, audited accounts for the past three years are also needed in order to confirm net profit.
But, as is the case with a growing number of mainstream lenders, Nationwide has its own specialist arm, UCB Home Loans. Applications that do not fit its strict criteria are passed on to UCB so that it can provide, in Reed’s words, ‘true’ self-cert mortgages. Here, there is no need to provide any evidence or accounts. A client’s declaration is taken at face value and no further proof is required unless they have a previous mortgage, in which case evidence of the last 12 months’ payments is needed. ‘We take self-cert literally to mean certification by that individual, and no-one else,’ says Reed.
Verso takes a similar approach, although verbal confirmation of income is needed from the applicant’s accountant or employer. If applicants are employed or contract workers, they must have a contract of 12 months with at least six months left to run. Self-employed applicants, in turn, are required to have been trading for at least two years.
One mainstream lender trying to take a more lenient approach to self-cert applicants is Halifax. It claims to assess applicants on a purely individual basis, with some clients gaining access to the lender’s product range by simply declaring their income without evidence. But many applicants may still be required to provide three years’ accounts, as is the case with higher risk cases at Nationwide.
Ray Boulger, senior technical manager at Charcol, says he tends to steer away from mainstream lenders when it comes to placing self-cert business. He claims that some deals targeted at the self-cert market may not, on closer inspection, satisfy applicants’ needs.
‘Some mainstream lenders may flag products up as self-cert when really they need more detailed evidence to judge the risk. New lenders entering the market tend to be a bit nervous and products that seem to have minimal requirements attached may on closer look need more lengthy information. We are always reluctant to use new lenders in the market unless we have a very trusting relationship, or until they can prove themselves over time,’ he says.
Indeed, Smith says it is experience and expertise that are the crucial factors when choosing a lender for self-cert business. ‘It is a specialist area that needs specialist underwriters to assess the risk. Lenders who write mainly mainstream business will find it difficult to build up the necessary expertise by dipping in and out of self-cert,’ he says.
Mainstream players are however trying to find new lending solutions for the self-cert sector. But with specialist lenders already one step ahead, having acquired the knowledge that experience brings, they have a lot of groundwork to cover. David Delooze, manager of mortgage credit policy at Halifax, says the first step it has to take is to try and understand the market. ‘It is not the underwriting expertise that is a problem, but it is the difficulty in understanding the self-employed as a group. We are making a positive effort to recognise the difficulties that this group faces and are in turn trying to address it,’ he says.
Headway is being made, as can be seen with Abbey National. Sharon Makin, media relations executive at Abbey National, explains that although it still sticks to a relatively low LTV, levels of evidence needed to back up applications have been significantly reduced since the lender first moved into the self-cert market. ‘We introduced self-cert products in the late 1990s and then we needed to see three years’ accounts from applicants. But with more people becoming self-employed, the market has really grown. We now ask that applicants have been self-employed for just 24 months and need a statement of income signed by an accountant. But we only lend up to a maximum of £150,000 and to an LTV of 75%,’ she says.
Specialist lender Mortgage Express, on the other hand, lends up to 90% LTV. Along with two other players in the market ‘ Bank of Scotland and GMAC RFC ‘ it has taken the concept of self-cert mortgages one step further by providing non-status loans. Here, applicants do not have to state an income or show any evidence of accounts. The risk is judged purely on the deposit and a minimum of 25% has to be put down. Roger Hillier, product development manager at Mortgage Express, explains: ‘If applicants are able to put 25% of the value down then we regard the loan as a pretty good risk. Not many people are likely to shy away after making such a commitment to the investment.’
The Bank of Scotland’s ‘special’ status mortgage works in the same way, but a deposit of only 20% is needed. Putting faith in borrowers being able to calculate their own affordability has, however, paid off. John Lloyd, director of mortgage sales at the Bank of Scotland, says its special status product has performed well. ‘Since we introduced the special status mortgage 10 years ago, we have found that it performs better than our other self-cert products,’ he says.
Non-status is popular among both the self-employed and people who have varied income streams, where the income seen on paper may not necessarily be a true reflection of what they can actually afford. Although non-status customers often do not want to disclose their income for tax reasons, Boulger says that having the choice to withhold information can reduce the risk of false information being supplied on application forms. ‘Non-status deals can be very useful for clients who do not want to state their income because of issues with the Inland Revenue. There are clients who have an income from a variety of sources who may be more reluctant to put them down. I would never encourage a client to lie on their application form, so the non-status route can be useful in that respect,’ he says.
With the self-employed and multiple worker groups set to grow even further, the amount of borrowers that need more flexible mortgage criteria will become even harder for lenders to ignore. As new players enter this lucrative market, it seems inevitable that they will have to enter with tightened definitions in order to safeguard the added risk. But, as can be seen with specialist lenders that have established themselves in the market, once a firm client base is secured and underwriters have the expertise and experience to transact higher risk business, definitions can be broadened.
So what does the future hold for self-cert definitions? According to Boulger, barriers are already being torn down. ‘The market has definitely seen an easing of criteria for self-cert customers such as increased LTVs and higher maximum loans, which has given more choice for borrowers,’ he says.
As definitions look set to continue to vary between lenders, it seems that advisers will have to stay on their toes in order to match the best products with the increasingly diverse needs of their clients.
Mainstream lenders tend to offer lower LTVs and require extensive evidence of income for self-cert mortgages.
Specialist lenders offer higher LTVs and require minimal supporting evidence for self-cert cases.
Applicants do not have to state their income for non-status mortgages, but will have to put down a hefty deposit.