The roots of the Self cert mortgage.
Self-cert mortgages are not so much mortgages in themselves but more a way of applying for a mortgage. Confusion has crept into the industry recently with a range of other definitions for what are effectively the same as self cert mortgages.
No Proof of income?
A self-cert mortgage is particularly useful for the self-employed for whom proving income can often be a less than straightforward exercise. Most self-employed business people want to use every legitimate means possible to minimise their level of declared income in order to minimise their tax liability. We understand that accountants throughout the country have, over the years, developed a number of 'creative' (but nonetheless legal) ways to do just that.
Tax reduction plan.
For example many business owners these days have elected to draw only a minimum salary and be paid bonuses in the form of divided payments. This reduces their tax liability significantly, but can cause problems when it comes to declaring income for the purpose of obtaining a self cert mortgage.
Seasonal business.
To complicate matters still further, the self-employed often have income patterns that are far from regular. Business can be seasonal in nature and people cans also generate income from more than one source, including buy to let property.
Proving income can not only be difficult, but sometimes can be downright impossible; therefore the need for a self cert mortgage becomes even greater. Uk mortgage brokers Apple Mortgages Limited have access to a range of self cert mortgage lenders.
Paid by bonus?
It is not only the self-employed who can encounter such problems. In certain circumstances, employed individuals who are on PAYE can also find defining or proving income difficult. For example, bonus payments can constitute a large portion of a person's income as in the case of car sales executives and double glazing sales people.
More than one source of income.
Individuals can also have more than one source of income and income derived from investments. Self cert mortgage requirement is therefore not purely the preserve of the self-employed; it can also be useful facility for employees.
Roots of the self cert mortgage.
Self cert mortgages first appeared in the UK mortgage market in the 1980's although it wasn't called the self cert mortgage at the time, The Mortgage Business (TMB), was very much one of the leading self cert mortgage lenders throughout that era. In the early 1990's self-cert, both as a name and as a facility, was disliked by many traditionalists and for a time the phrase 'high equity' was used instead. However, this caused great confusion, particularly among intermediaries, and the name self cert mortgage was adopted once again and has remained in place ever since.
Self cert mortgages came under the microscope for the first time as a result of a BBC Money Programme investigation in October 2003. The programme revealed that some intermediaries and lender staff had been encouraging borrowers to falsely inflate their incomes and then use self-cert as a way to obtain larger mortgages than they would otherwise be able to get using traditional income multiples.
Regulation.
The next major test of the self cert mortgage was the introduction of regulation. Following a period of voluntary regulation, broker's selling techniques were subject to tight rules and regulations and advice had to be carefully documented and, if needs be, justified at a later date.
It was almost inevitable, given such a major overhaul of business practices that some non-compliant procedures would be unearthed and that are precisely what happened when the FSA carried out a mystery shopping exercise in November 2005.
The FSA's mystery shopping exercise involved 41 brokers and found three firms that were willing to discuss the possibility of overstating incomes with borrowers. The FSA also visited 39 small firms and reviewed 249 customer files and found strong evidence of poor record keeping and significant failings relating to affordability and suitability checks being carried out by brokers. For example, where proof of income was available advisers failed to record why a self-cert mortgage had been recommended rather than a cheaper full-status mortgage.
The FSA also found inadequate documentation for self cert mortgages supporting why specific product recommendations had been given, taking into account the stated needs and preferences of the borrower.
Speculation
It was not just brokers that were put under the microscope by the FSA; lenders were also subject to visits. Fortunately, lenders had tight procedures and the FSA was generally happy with the practices being adopted by them in the sales of self cert mortgage products.
The results of the FSA thematic work and mystery shopping exercise fuelled speculation that the FSA was not at all keen on self cert mortgages particularly self-cert for employed borrowers, and was eager to bring self-cert mortgage lending to a halt. However, there is no evidence to support the speculation. On the contrary, the FSA appears to have taken a very pragmatic approach and has made it very clear throughout its investigations that what it is primarily concerned about is seeing evidence of best practice in the sale of self cert mortgage products.
Intermediaries therefore need to ensure that their record keeping and documentation is in good order. If they have recommended self-certification (or any other type of mortgage product for that matter) they need to be able to show documentary evidence of the reason why they have made a specific recommendation of that self cert mortgage.
Affordability.
A core part of the advice process is the need to assess affordability. Even though a borrower may be applying for a self-cert mortgage, it is still the responsibility on the broker to ensure their client can afford to repay their monthly repayments.
That means checking income and outgoings and ensuring that the information given by the client seems reasonable. For example, the average salary for a builder's labourer is £16,700. A client stating a salary of £30,000 should immediately raise suspicion - it certainly would to a lender.
Affordability has become increasingly important in the regulated mortgage market and increasing number of lenders have now adopted affordability calculations as the base of assessing maximum loan amounts, rather that traditional income multiples.
Affordability calculations are far better at assessing a person's real ability to repay their mortgage, because they are based on net disposable income, rather than simple gross income. After all, it stands to reason that a borrower who is unencumbered by high levels of debt and monthly living expenses, can afford to borrow significantly more on a self cert mortgage than someone on a similar gross salary, but who is carrying a high level of debt and who live an expensive lifestyle.
Self Cert Importance.
As affordability calculations have been introduced by an increasing number of lenders, so the need for self-certification has started to diminish. Cases that would have been pushed down the self-cert route in the past are not switched into products, which are based on affordability models.
At the same time, lenders have been reviewing their lending criteria and today many standard products will accommodate applications, which would have been classified as self-cert in the past.
This does not mean, however, that it is the end of the road for self-cert. The fundamental reasons for borrowers requiring self-cert mortgage have not changed and are just as valid today as they were back in the 1980's. Self-cert fulfils an important role and will continue to do so for the foreseeable future.
Accurately determining the size of the self-cert market is difficult because Council of Mortgage Lender (CML) statistics do not identify self-cert as a product in its own right. However, lenders who are active in this market tend to agree that the market is worth between £22 billion and £25 billion in gross lending each year.
The range of projects on offer through self-cert is enormous and uk mortgage broker/ bad credit mortgage brokers and their clients are certainly not short or choice. Many lenders will offer self-cert mortgage facilities of up to 90 per cent LTV and gone are the days of high premium rates. The margin over full status mortgages is now very small.
Self cert mortgage is a facility, which brokers can use, in appropriate circumstances, to add real value to the service they provide for their clients. Many borrowers are not aware of self cert mortgages and it can provide an instant solution to an age-old problem of trying to prove income in the traditional way.
The future for self-cert appears to depend of the demand for the product - which seems to remain high - but on intermediaries and lenders adopting best practice and selling the product in a responsible way. Most importantly, brokers need to keep on top of their record keeping and ensure that, if ever they are asked to prove it by the FSA, they are able to do so.