The self-certification mortgage product appeals to a wide range of borrowers, including employed first-time buyers and people who are willing to pay a small premium to get their mortgage sorted out quickly.
Reports suggest there has been an increase in first-time buyers’ take-up of self-cert mortgages, particularly in the South East, as it is harder to get on the property ladder. But this should not necessarily be seen as a problem as long as good lending practices are being pursued. However, it is crucial that brokers give realistic advice concerning salary multiples; if the loan is four or five times the salary, they should ensure the borrower can truly afford it. In fact, the bottom line for the future of self-cert lending is that it has to be handled responsibly.
As well as the potential dangers of self-cert borrowers over-stretching themselves, self-cert mortgages can leave brokers vulnerable, as the FSA will insist they personally assess what clients can afford. The lender often just wants to be told that a borrower can afford the loan and their income is sufficient, however, this is clearly not responsible lending and the FSA will not allow it.
To avoid the pitfalls of self-cert, responsible lending is required and the following four points are guidelines for the future of self-cert mortgages:
Know the client
It is important for both lenders and intermediaries to understand the profile and needs of the self-employed borrower. From a lender’s perspective, underwriting processes must be suitably robust to ensure minimal risk, but flexible enough to accommodate the nuances particular to this sector, most notably, irregular or varied sources of income. Likewise, intermediaries need to understand how to assess the different circumstances of each applicant and demonstrate in-depth knowledge of the variety of different certification requirements and criteria set by lenders.
Most lenders will ask for income to be stated, although criteria can vary from a simple signed declaration of income to detailed accounts. Indeed, one of the key issues for the self-employed in applying for a mortgage is the ability to provide proof of income, as their business may not have been trading long enough or the applicant may find it difficult to provide detailed accounts. They may also have unconventional or additional sources of income – such as investments or rent – they wish the lender to take into consideration. For this group, self-cert is the best option, as it provides an alternative facility for applicants to make a formal statement regarding the extent of their income and ability to afford the repayments.
An affordability declaration protects the broker and demonstrates that responsible advice has been given to borrowers and that they have fully considered the implications of their loan.
The declaration should provide borrowers with information on the likely impact of changing interest rates and the effects of taking on additional financial commitments such as new loans. This is a potential solution to the issues raised by the FSA in CP186 questioning the suitability of traditional self-cert mortgages for employed borrowers. The FSA believes lenders should fully assess a borrower’s ability to repay a mortgage prior to granting a loan.
Payment protection is often crucial with self-cert mortgages. The self-employed, or those in contract work, are vulnerable to peaks and troughs in their income often with no reserve if they are unable to work due to illness or accident. First-time buyers are also vulnerable because they are likely to have high LTVs and no savings to fall back on should they suddenly suffer loss of income.
Experienced advisers are crucial in the sale of self-cert mortgages, as it is essential clients are fully aware of all the relevant issues.
As competition hots up, so too will the choices available to borrowers, who will increasingly turn to intermediaries to guide them through the myriad of products on offer to find the one best suited to their needs. Meanwhile, lenders will continue to review and refresh their products to encompass different features to suit the self-employed such as greater flexibility, fixed and capped rate products, as well as investing time and effort to ensure their underwriting processes can handle these cases.
However, with growth comes complexity. Advisers must remain alert to the rapid changes in the marketplace, keeping abreast of the plethora of new lenders entering the market and new product innovations, to ensure they can deliver the best value to clients. The self-employed market represents huge opportunities, and lenders and brokers alike must ensure they are fully equipped to cater for the needs of this flourishing market.
If self-cert mortgages are not dealt with responsibly, then they will be restricted to the self-employed. This will mean an awful lot of people will be unable to get a mortgage, which will be detrimental to the whole industry.
Self-cert must only be recommended when it is in the client’s best interests.
Some firms are now trailing affordability declarations to ensure borrowers are clear what they are getting into.
Greater competition will increase the range of products, making the role of the adviser invalid.