The demand for self-certification mortgages is booming and this healthy state of affairs is expected to continue for the foreseeable future as the UK’s labour market and our modern lifestyles continue to evolve.
Life has become more complex. Long gone are the days when the majority of people were employed by businesses who paid them a regular income. In those days, most people stayed with the same employer for most of their working life. It was safe and predictable.
The change in working patterns in Britain was precipitated by the Thatcher ‘revolution’ of the 1980s and 1990s. Great emphasis was placed on the development of an enterprise culture, which led many people to set up their own business. At the same time, companies were encouraged to become leaner and meaner. Instead of an ‘across the board’ pay rise, salary increases began to depend on performance. Commission payments became more common as bosses sought to incentivise their workers.
While the changes have led to greater personal freedom and a more dynamic economy, they have also made an individual’s future and their personal finances more uncertain. According to the Office of National Statistics, around 10% of the workforce (three million people) is self-employed, 1.7 million people are employed on short-term contracts and a further six million people are classified as part-time workers. There is also a trend for people to have more than one job (often referred to as a ‘portfolio career’), while others receive additional income from investments, buy-to-let properties and inherited monies.
These people are hard working and often financially solvent, but not many of them would be offered a mortgage if their application was subjected to a high street lender’s credit scoring system. This is because most would struggle to substantiate their income.
This rapidly-growing niche market has been served for a number of years by a group of specialist lenders who have developed products and application procedures that allow borrowers to obtain a loan without having to prove their income. Instead, applicants simply state their income and declare that they can afford to repay the loan.
Self-cert mortgages have historically been marketed by around 15 providers, but in response to the growing size of the market over the last year this figure has grown to 28. This increase in competition spells good news both borrowers and advisers, as lenders now offer a growing range of competitively-priced products. Applicants can finance their purchase from a range which includes fixed, discount and tracker mortgages at increasingly competitive rates.
However, to a certain extent, self-cert is an illusion. While the borrower has to state their income, the lender undertakes a number of checks to verify the information provided. In particular, a full credit check is carried out on the applicant through a credit reference agency. These checks often reveal any discrepancies in an applicant’s financial status. In addition, a qualified underwriter will usually consider a self-certification application in closer detail, than perhaps they would a standard mortgage that came with all the necessary references.
This is not to say self-cert is no different to any other specialist mortgage. We conducted research that found 95% of brokers surveyed considered underwriting rather than credit scoring to be the best way of determining an applicant’s suitability for a mortgage. An experienced underwriter can judge the validity of statements made by the borrower and has a working knowledge of the level of income which should be generated by people employed in various professions, or those who own a particular type of business.
Essentially, an underwriter is able to take a much more flexible approach to analysing an application and also provides a point of contact for brokers who may wish to discuss their client’s application further. So far underwriters have a good track record on deciding which cases to approve and which to reject. So while at first sight the self-cert market would appear to be high-risk, the evidence is the checks and balances in the system ensure loan defaults are no worse than those experienced on standard mortgages.
The self-cert niche is a natural market for brokers, who should be able to add value to the client by using their skills, contacts and market knowledge to source the best product, which they would not necessarily have been able to find themselves. From experience, borrowers whose applications have been rejected by high street lenders are increasingly seeking this type of advice.
The establishment of a good relationship between a broker and a lender is the key to a self-certification mortgage application progressing smoothly. An important role for the broker is to help the borrower pull together all the information they can to prove where their income is generated. Ideally this process should enable the broker to take a considered view as to whether or not their client can afford the loan they are applying for at an early stage. After all, there is little point in a broker submitting an application unless they are confident the loan will be approved.
Brokers studying the self-certification market will see that while the number of products has expanded they do not vary greatly from standard products. Only 20% of self-cert borrowers are charged a higher rate or fee than standard prime customers and this usually only occurs where there is a perceived greater risk, or where the processing of their application has been more time consuming. But what they will notice are the different approaches adopted by lenders and their experience of managing the risks involved.
Recently, some self-cert lenders have adopted a more pragmatic approach considering self-cert applications. Applicants no longer have to state their income, instead they must sign a statement declaring they can afford the repayments. They are also asked to provide an indication of their income profile, for example, the percentage of their income derived from employment, investment, or pensions. Applicants with a deposit of less than 25% must also provide three months’ bank statements to prove they conduct their financial affairs in a good manner.
It is thought this more mature approach to lending is a reflection of the growing stature of this sector and will help speed up the application process. While lenders recognise it places a greater responsibility on the broker to review their client’s needs and resources accurately, it is in everyone’s interest to ensure the borrower takes out a loan they can afford to repay each month.
The decision to reduce the amount of information required has been prompted by dialogue between lenders and brokers, which identified demand for a radical change in lending criteria. Research has revealed that in order to get the loan required, it was not uncommon for borrowers to state an inaccurate level of income. The simple reality is that some applicants struggle to identify a ‘true’ level of income and that for many self-employed people their income may fluctuate from month to month.
These research findings highlighted the traditional approach of analysing a self-cert application, namely using an income multiple based upon what could be a ‘hypothetical’ level of income, probably did reflect the real ability of a borrower to repay a loan.
Often self-employed people ‘ on the advice of their accountants ‘ take measures to reduce their tax liabilities by minimising their paper income. Their accounts reflect their previous year’s trading and may not provide a realistic insight into the current financial health of their business. These people are financially aware and used to planning and budgeting. They should know whether they can afford their repayments or not.
The development of the self-cert market has evolved in response to the changing needs of customers. From a small beginning it has now come of age and due to the more complex lives we are leading self-cert it is likely to be increasingly seen as part of the mainstream lending market.
It is also a market which brokers would be advised to do their research on in order to identify those lenders who really understand the risks involved and are willing to work in partnership to get the best deal for the client.
The personal circumstances of people applying for self-certification mortgages are usually not straightforward, and placing their business will require brokers and lenders working together to find a unique solution to a unique problem. Finding the right answer is not rocket science; it is usually just common sense.
Paul Howard is sales and development director at Sun Bank
The potential market is huge with over 10 million people either self-employed, or on short or part-time contracts.
Clients can now obtain a loan simply by signing a declaration that they can afford repayments.
New products do not vary ‘ in terms of rate and range ‘ from standard mortgages.