Self-certification mortgages are growing in popularity. New lenders are entering the market and research has shown that around 78% of mortgage advisers now provide advice on these types of mortgages. So what is all the fuss about, and why should you consider advising on self-certification mortgages?
The basic principle of a self-certification mortgage is that your clients are able to certify their own income by simply stating their earnings on the mortgage application form. The benefit is that your clients do not need years of accounting information, or piles of payslips and P60s to prove how much they earn. With ‘true’ self-certification, checks are not made with accountants or employers as the client signs a declaration confirming the details provided are correct.
This approach makes the whole process of obtaining a mortgage far easier for the self-employed who may have only been trading for a relatively short period of time, do not have a qualified accountant or do not have up-to-date accounting information to hand.
Lenders have traditionally taken a less than enthusiastic view of self-employed customers unable to provide up to three years’ worth of accounts from a chartered or certified accountant, so self-certification can be of real help to these borrowers.
For the employed it makes life simple for those who rely heavily on bonuses, commission, overtime, shift allowances, or other variable forms of income as they can take all these into account when declaring their income. In many cases, lenders would ignore these elements of income, or only take a percentage of their worth into account when calculating how much they can borrow.
So why should you consider placing ‘alternative mortgages’? Many advisers take the view that they want to deal with straightforward mortgages ‘ mortgages where the clients fit the standard high street lender’s ideal profile.
Essential information such as a continuous history of employment, pristine evidence of stable salary earnings and the purpose of a loan being for house purchase spring to mind. Forget contract workers, the self-employed, cash-paid employees, or anyone who is looking to remortgage to raise capital. With self-certification mortgages there are fewer cases turned down by the lender, which means less time wasted in dealing with mortgages that do not fit the mould. This may be fine for the reported three out of four of us who fit the standard borrower profile, but what about the other one in four of potential mortgage applicants within the UK? Can you afford to ignore them?
By looking at self-certification lenders, many of the reasons for not dealing in ‘specialist mortgages’ disappear. Self-certification lenders are geared up to accept clients who do not fit the high street profile. They have underwriters who understand the circumstances of the self-employed, contract workers and employees who rely on more flexible forms of income, and their credit profiling systems are geared to work in favour of these clients rather than against them. This means you can send a mortgage application with the confidence that the case will be accepted, without wasting your time. In most cases, if you want to be certain, you can now get an agreement in principle before going to the trouble of completing the application form.
Self-certification helps complete your mortgage advice portfolio. It can be of use to a whole range of clients and give you the opportunity to look at other sales opportunities. These opportunities are increased when dealing with self-employed or contract workers, as they often have above-average financial needs. These clients will not be part of an employer’s pension scheme, be offered free life assurance cover, given enhanced sickness payments, or receive many other financial benefits that a lot of employees take for granted. They also have additional insurance needs relating to their business and often want to safeguard their income through insurance policies. If you do not look to help these groups of customers with their mortgage needs, you will miss out on the chance to review their whole financial situation.
In the mid-80s, although unrelated in terms of the lending they offer, self-certification lenders tended to be lumped in with sub-prime and non-status lenders. At that time, these lenders were viewed with a certain level of mistrust and were seen as being at the lower end of the mortgage market.
Since then, lending practices have improved substantially and various lenders have carved their own niche in the market, offering separate specialist products and earning their own respectability. However, if you have never placed a self-certification mortgage before, or do not know who provides these mortgages, it is easy to understand why you would shy away from using a self-certification lender.
If you want to find out more about self-certification lending, where do you start? A quick scan of the mortgage industry’s monthly publications from August this year, reveals at least half a dozen articles on specialist lenders. Some publications also include reference directories listing who does what. Mortgage sourcing systems can also provide a good starting point as they often include filters to help brokers identify self-certification deals. Table 1 provides details of a few specialist self-certification lenders.
Including self-certification in your mortgage advice portfolio may prove fruitful. Specialist lenders provide a wide range of mortgage products. Fixed, discounted or variable rates, buy-to-let and flexible mortgage products all come as standard and the service provided is a welcome bonus. Many specialist lenders no longer charge a mortgage indemnity guarantee or require compulsory insurances, but it is worth checking to be sure. Mortgages are also available for purchase, or remortgage up to 85% loan to value ‘ all without the need for confirmation of income.
Another good reason for taking the self-certification route is that these lenders are often happy to remortgage for capital-raising purposes, whether for business or general use. You may have clients who want to raise capital for their business and it can make sense to raise the money on their residential property at residential rates, rather than more expensive business rates.
For example, if a client with a small firm was looking to raise money to purchase materials to fulfil a major new contract, they could remortgage their home to do just that. If they took a flexible mortgage they could also pay back the money they borrowed on their mortgage without a redemption charge when the contract was complete and the profit has been made. This allows businesses to borrow on a short-term basis at a relatively low rate of interest. There are numerous reasons why a businessperson might want to raise capital on their home, but it is really the benefit of a flexible mortgage that makes this a viable option. The ability to borrow and repay money quickly and cost effectively on a long or short-term basis helps borrowers’ money work harder for them.
Plenty has been written in the press about the increase in more flexible forms of employment and the need for lenders to adopt a more flexible approach to assessing earnings. A quick review of the figures provided by the Office for National Statistics confirms that, as of September 2001, over 12 million people work in more flexible forms of employment such as self-employment, part-time work, temporary positions or have more than one job. This is an increase of around three million since 1992, which may give some indication of the future growth in these forms of employment.
If more people move away from the traditional Monday to Friday, nine-to-five working environment, will you be able to service the needs of your clients in the future?
Table 1: Specialist self-certification lenders
Lender company number
UCB Home Loans Nationwide BS 0845 940 1400
The Mortgage Business Capital Bank/ 0345 253 253
Bank of Scotland
Mortgage Express Bradford & Bingley 0500 050 020
Verso Britannia BS 0845 840 3020