Rights and Wrongs of Self-Certification Mortgages
Do self-certification mortgages have a place in the wider mortgage market? Views on the increasing numbers of self-cert mortgages are very mixed. Some experts and commentators say the product meets a genuine need while others remain concerned that these mortgages are just waiting to be misused by consumers. But with self-employed status becoming more and more the norm in modern economies the need for self-cert mortgages has never been greater. Their growth also seems likely to accelerate.
Self-certification is not a new financial derivative product but rather a necessity in today's market because many wealthier but self-_employed people would not be able to get a mortgage any other way. A self-certification mortgage is a mortgage where the loan amount that is given is decided by the borrowers actual income as declared by them but which cannot be proved in the classic way with P60s or audited accounts.
What should borrowers be aware of when considering a self-cert? Although 'income stretching' is unlikely to be a problem when interest rates and unemployment remain low, the danger arises when credit becomes scarce and interest rates rise. Consumers need to understand the longer-term consequences of taking on high loan to asset ratios at a time when interest rates could rise and consider how they would manage when their mortgage repayments increase.
In effect it is similar to the question always asked about guns in society. Is the gun merely the tool and the real weapon is the mind behind the holder? Should self-certs be blamed for the occasional default due to false income statements?
There are alternatives to self-certification however. Some lenders, including Halifax, Woolwich, Abbey, Nationwide, Northern Rock, Bristol & West, Portman and Standard Life Bank, use a sexily titled method called 'fast-tracking' for standard loans. This is where the prospective borrower has specified large amounts of cash on deposit with the lender and is not a first-time buyer. Typically, at least a 25 per cent deposit is required, although Northern Rock required only 20 per cent prior to its cash flow difficulties of course.
This kind of fast tracking is not self-certification, although similar in the sense that applicants do not have to provide proof of income. This kind of 'declare it yourself' mortgage may be a small but growing trend in the mortgage market but it does drive the need for specialist, honest, independent mortgage broker advice.
Do take extra care if you are in the position of wanting to buy your home but unable to prove your income. Look forward and calculate what would happen to your repayment capacity if the interest rate were to rise significantly. Take your mortgage brokers expertise and shop around for the best deal not just on income multiples but on deposit level, interest rate, exit fees and post sale service.
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