What is self-certification?
Self-certification is a facility offered by some specialist lenders where applicants are allowed to certify their own income, which lenders will use in their assessment of the application. This facility is suitable for applicants who cannot provide the sort of documentary proof of a regular income that most mainstream lenders would expect to see.
Is self-certification just for the self-employed?
Self-certifying income is ideal for the self-employed. This is because the traditional documentary proof of income required of self-employed applicants, for example three years’ audited accounts, showing consistent earnings levels is often difficult to provide. This could be because applicants have not been trading for long enough, or because in recent yearsš income figures do not show consistent earnings levels. Historical accounts could also fail to reflect current earnings levels which may be higher than previous years.
However, self-certification could be suitable for other applicants, including those who are on short-term contracts, or those who have income from a number of sources.
Which type of clients will be interested in self-certification?
Self-employed professionals such as designers and consultants could benefit from self-certification, along with other small business owner-managers such as mechanics, retailers, hairdressers, gardeners and cleaners. The directors of younger/smaller limited companies could also benefit from self-certification if a proportion of their income is from dividends (which are not classed as regular earnings). Some employed applicants may have a salaried job as well as one or more cash-earning jobs. In this case it is usually possible for them eventually to obtain documentary proof of income from all employers, but this can take a long time. This means self-certification is often the preferred option as it speeds up the application.
How big is the potential market for self-certification mortgages?
Official Department of Trade and Industry statistics show there are more than three million self-employed workers in the UK ‘ over 11% of the total workforce. However, this is just the tip of the iceberg when it comes to the potential market for self-certification which extends to employed people as well. For example, there are around eight million tax payers registered for self-assessment, which means they have income from a number of sources which fall within the self-certification market. Research has shown there is a disturbing lack of knowledge of the self-certification option among small business owners, with more that 70% unaware of this facility. So mortgage advisers could possibly increase their own markets if they put some time and effort into explaining the self-cert route to potential borrowers.
Does self-certification mean lenders do not make any other checks?
The majority of mortgage providers have credit policies that require complementary checks to be made, to reassure themselves that applicants have both the means to make regular payments, plus a good record of doing so. This will normally entail a call to the accountant or employer stated on the applicant’s form, to check they do have the relationship as stated by the applicant.
Lenders should not lose sight of the Financial Services Authority’s (FSA) draft regulation document (CP98, Annex B, Section 9 Responsible Lending) which reminds them to take into account the customer’s ability to pay, by reference to their income, when entering a regulated mortgage contract. It is specifically stated that the proposed regulation does not preclude assessment of ability to pay on the basis of a self-certification of income. There is no information about what other checks should be made. This may be left for individual lenders to decide depending upon their own ‘philosophy of lending.’ Is their perceived risk of lending one of non-payment, or loss on taking possession or both? The answer to this may shape their attitude to the question of ‘checking.’ While the content of CP98 is in limbo pending the FSA proposals on full regulation of mortgages, it seems unlikely this section will go away.
In both self-certification and non-status lending, lenders may search credit reference agencies and other payment-record databases to reassure themselves the applicant meets their payment commitments regularly and on time.
Can self-certification applicants take advantage of special rate offers and the newer products such as flexible mortgages?
Self-certification is not classified as a niche product:š it is a category of niche borrower. As such, many lenders catering for self-certification applicants will offer the sort of special discounts and fixes that are open to full status applicants. One product particularly suited to borrowers with a self-certification lifestyle is the flexible mortgage. With this product borrowers, whose incomes fluctuate or are seasonal, can make overpayments when cash flow is good, and then take payment holidays during the slow season.
Jim Washington is director of credit at Verso