The growth of the self-certification (self-cert) mortgage market has been well documented. However, while it means more choice for borrowers it also makes it more difficult for mortgage brokers to find the right product for their client.
Lenders in this sector all have different areas of flexibility, so it is vital advisers become fully conversant with the differences in order to find the best deals.
The self-cert market has developed enormously over the last few years and, with an average growth of almost 14% a year since 1997, the total self-cert market was worth £11bn last year.
Mainstream lenders have now realised the potential for expansion in this market and, as a result, what was once a niche market with fatter margins is fast becoming closer to mainstream with the associated slimmer margins.
Opening the floodgates
Until recently those brokers operating in the self-cert market were dealing with approximately 15 lenders, a number which is now closer to 28. But as a result of this increase in competition, there has been a significant improvement in customer choice.
The increase in competition has also meant, therefore, that interest rates have become much more attractive and with a much wider selection of products. In addition to the change of stance by the lenders, lifestyles have also changed and the hackneyed ‘job for life’ has gone forever, with people often made redundant more than once. If this happens a few times, who can blame someone for deciding to become self-employed and remain in charge of their own destiny.
According to the Office of National Statistics, around 10% of the work force ‘ approximately three million ‘ are self-employed, with 1.7 million people employed on short-term contracts and a further six million classed as part-time workers. In addition, many people have two or even three jobs to top up their income and with an increase in the number of landlords, more people are looking after several properties on a buy-to-let basis, all of which provide an additional income.
In choosing the right product for their clients, brokers first need to analyse exactly how ‘self-cert’ their client’s deal needs to be. Some lenders still require documentary evidence, such as bank statements, payslips and accountants’ letters to verify the declared income. However, if people are looking to self-certify their income it is likely that some will not, or simply cannot, supply that evidence.
The truth is out there
As the self-cert market has developed, more lenders are adopting what is called a ‘true’ self-cert attitude where they do not make checks on income. They will, however, expect the declared income to comply with their income multiples even if they do not check it.
It seems many borrowers may find it difficult to state an accurate level of income, because their income may fluctuate from one month to another. However, using the traditional income-based multiplier and applying it to the total income received seems to reflect the borrower’s ability to repay the mortgage.
For those with accounts, it is well-known the figures reflected in their trading accounts are intended to reduce tax liabilities and therefore they are not usually conducive to giving the correct insight into the customer’s true financial situation.
In the main mortgage brokers should be looking at either 3.25 or 3.5 times single plus one, or 2.75 times joint. Be careful on minimum age as this can vary, for example, whereas Birmingham Midshires Solutions’ minimum age is 18, The Mortgage Business’ is 20, (except 10 to let which is 25), UCB’s and Mortgage Express’ is 21 and Bank of Ireland’s is 23.
The maximum loan to value (LTV) also varies from lender to lender and so does the maximum loan size within the LTV limit. Bank of Ireland scores well with a maximum 85% of £500,000. Not all lenders will allow first-time buyers at the maximum LTV and most will insist they are on the electoral roll. Mortgage Express will lend up to 90% LTV to first-time buyers and up to £250,000 at this LTV.
As in the mainstream market, some lenders still charge a mortgage indemnity guarantee (MIG), for example, Mortgage Express, UCB, Birmingham Midshires Solutions and Bank of Ireland do not charge MIG. However, The Mortgage Business does charge MIG from 70% LTV.
Most lenders will consider a loan if the applicant has either been self-employed for 12 months or in employment for six months. This can alter with LTV limits and depend on employment history. However, some lenders, such as Birmingham Midshires Solutions, will accept three months’ employment if they have maintained continuous employment.
All shapes and sizes
In terms of products the range is now huge and attractive rates are always being promoted. It is interesting to note many of the self-cert products carry redemption penalties during the discount/fixed rate period although overhangs have almost disappeared.
Discounts and trackers are attractive at the moment, but always check out the underlying rate as this also varies considerably from lender to lender. This is an area that brings exclusive deals to the fore, as there is room to manoeuvre a good competitive deal within the product model. As usual the product selected would always need to fit the client’s lifestyle and if they are thinking of expanding or setting up a second business in a different part of the country, they may need to let out their property or possibly sell up. Obviously a redemption-free product would be more suitable in this scenario, and many flexible self-cert deals allow daily interest and all the other benefits that go with flexible mortgages.
This opens a can of worms for those who have reservations as to whether this type of mortgage could lead to serious overspending and ultimately end up with the mortgage itself being a problem.
For the main part most self-employed people have to keep tight control over the finances in their business, or they pay someone who does. Managing their mortgage would just be another aspect of running their financial affairs. Provided the underwriting is correct, there is no reason why the default ratio should be any different to mainstream lending, and certainly there is no evidence to the contrary at the moment.
The customer profile of the flexible borrower tends to include people who receive bonuses, investment income, or those who run seasonal businesses and therefore need to be able to overpay and underpay in leaner months. VAT payment is frequently ‘saved’ and put to one side in readiness for the quarterly payment. This could then be paid into the flexible account and reduce the interest payable for close to three months at a time.
The number of self-employed people in the UK is 3.2 million and according to the Federation of Small Businesses, there are up to 50,000 business start-ups that will mature.
Ditching the paperwork
Despite forthcoming mortgage regulation, the industry as a whole offers a superb range of mortgage deals, the best seen in 27 years. Not only low rates but no overhangs and increasing penalties at all. Yet lenders are still looking at ways to attract more business, and by streamlining much of the processing and reducing the amount of paperwork required they have succeeded. They therefore rely on accurate underwriting and case assessment, so they can accept as many deals as possible within their criteria guidelines.
An experienced underwriter will check the validity of the information provided by the borrower and have a working knowledge of the level of income expected from the profession shown. This, combined with the usual credit checks, has proved to be a successful way of picking out those cases for rejection.
Service levels among the self-cert lenders have held up well this year, and brokers consider UCB to offer a consistently good service. Also the fact The Mortgage Business does not credit score allows them to accept cases that other lenders may reject. The fast route to knowing the case has or has not been accepted is through decision in principle, and Mortgage Express has always encouraged brokers to go down this route.
Now with online technology the decision is quick and providing the application details match those on the decision in principle form it should fly through. Applying online is catching on fast as the way to achieve a speedy response from lenders, and no doubt in a year a much larger proportion of brokers will be transacting a large proportion of their business via an online route.
As in all sectors of the market, the borrower’s circumstances are never straightforward and this is where a good understanding of the self-cert market and the lenders that operate and specialise in this type of lending could save so much time.
Sally Laker is managing director of Mortgage Intelligence
Brokers first need to analyse exactly how ˜self-cert’ their client’s deal needs to be.
More lenders are adopting what is called a ˜true’ self-cert attitude where they do not make checks on income.
Flexible mortgages can be ideal for self-cert borrowers as they are used to monitoring their finances.