With such a significant part of the UK population now working for themselves, lenders are searching for a way to support their borrowing needs.
So this month, Specialist Lending Solutions asked its expert panel whether self-certification should return to the mortgage market?
I think like myself, most advisers are in agreement that self-certification, certainly the way we used to know it, should not return.
The past version was too open to fraud and abuse leaving many consumers in a vulnerable financial position.
With HMRC heavily invested and focused in ensuring that all income is openly declared and tax paid, it is hard to see how self-cert could fit into the current market.
That said, I do think an increased degree of flexibility around income, particularly for self-employed people, is very much needed.
The latest figures from the FCA indicate around 120,000 clients are mortgage prisoners stuck on variable rates with lenders that are not trading and are not being regulated by the FCA.
This means the regulator has very little power to influence the lenders to give the consumer a good deal.
In many of these cases, demonstrating affordability in the current market is a barrier to remortgaging to get a better deal.
Prior to the Mortgage Credit Directive, lenders were able to use the transitional rules to take on remortgage customers without assessing affordability in the way of the current market.
However, most lenders chose not to adopt this opportunity. This may have been due to risk appetite, systems or fear of future regulation reprimand.
If the FCA really wants to find ways to help these consumers they will have to consider seriously the options of how they can provide a regulatory environment that makes this a possibility.
While it is true that too many workers such as contractors, freelancers and sole traders are still being unfairly excluded from the mainstream mortgage market, I don’t think the return of self-cert mortgages would satisfactorily address this problem.
In the past few years we’ve seen the market adjust to make provision for more of these kinds of customers, with some lenders helping to widen the range of options for borrowers who may not neatly fit the tick box criteria of the mainstream.
This includes self-employed people who might not necessarily be able to provide the proof of income needed by high street banks, even though they may be able to afford a mortgage.
Lenders such as Together have become more accommodating in what evidence we will accept as proof of income for the self-employed and those with irregular income, and adopted an individual approach to our underwriting.
We’re constantly striving to smooth the process of income and employment verification and expect technological advancements in this area to improve the experience for customers and brokers. However, evidence of affordability still needs to be there to make sure the borrower can pay back the loan.
Self-cert mortgages were banned in 2014, wisely in my view, as a way of protecting consumers from taking on too much debt and I can’t see any appetite from the regulator to reverse this position anytime soon.
When self-certification first appeared it had a very specific use – for those self-employed people who earned income in a way that did not meet lenders exact requirements of three years’ accounts and it was always backed up with an accountant’s letter.
It was a very niche product for mainly high-net-worth individuals and for the right customer it worked well. There were no massive issues.
The problem was that it then grew into an acceptable mainstream way of doing things, open to all without further backup and of course open to abuse that lenders often turned a blind eye to as they chased volume.
And therein lies the rub; it is always hard to put the genie back into the bottle and any return to such a product now would be immediately abused without proper checks that would render the product pointless.
Human nature and history unfortunately proves that there are people who will try to take a mile when given an inch.
When we have worked so hard to get the cowboys out of our industry and make sure that borrowers can afford what they borrow and get proper advice, it would be crazy to reintroduce this now.
In fact, given the way we are going, when technology will be able to read bank statements quicker, link-in to HMRC and work out affordability in a more exact and efficient manner, there seems no point to go back to it ever.
Let’s leave it consigned to history, on display with the dinosaurs under the caption “seemed like a good idea at the time”.