The Self-Certification Mortgage Idea.
The self-certification mortgages are becoming more and more popular because of the rising number of self-employed people who find it hard to meet the usual borrowing eligibility criteria. But as property prices inflate, some people are turning to self-cert mortgages in order to overstate their income and thereby get onto the property ladder.
Self-certification mortgages put the responsibility on the borrower to report their earnings and to specify their own repayment plan. Borrowers sign legally binding documents which state their income but they do not have to provide traditional proof of earnings, such as with a P60.
Self-certification loans are aimed at borrowers who would beyond the normal employment situations. This includes people on serial temporary contracts and those self-employed people with limited accounts history. One of the attractions of a self-cert mortgage is that it possible for borrowers to ask for bigger loans than they would get with the standard income multiples offered by the big lenders.
They are also useful if a large proportion of your salary is made up of incentives. Say, you are a city trader for example with a basic salary of £80,000 and receive a further £100,000 in performance related pay. Most lenders would take only half the bonus plus your salary into account and would offer you a mortgage multiple on £90,000. A self-certification deal could get you a mortgage on the full £180,000.
In the past five years of easy credit and low interest rates, lenders have been taken advantage of this financial innovation. Many of them have gone into the self-certification market, with almost 30 per cent of all UK mortgage lenders now offering at least one self-certification product.
Of course the greater risk has meant higher rates on self-cert deals. They are usually up to a percentage point higher than typical standard loans. Advisers tend to recommend people for self-cert mortgages and go for a short-term deal of two or possibly three years. Given a successful repayment track record and the end of the easy start period you may be able to switch to standard lending criteria and get a lower rate.
The amount that lenders are willing to lend on self-cert deals is also less, normally 85% of the property value. This means that you must be prepared to put in a 15% deposit.
Self-certification loans have had some bad press lately although has been because some less than scrupulous advisers have colluded with borrowers to lie about their incomes. Even some first time buyers desperate to get on the property ladder have been over extended on such bad advice. Of course this is not about the self-cert products themselves but just the usual odd bad apple.
Self-cert mortgages are still regulated by the FSA and the necessary safeguards are in place to prevent widespread misuse. However, despite income checks by credit reference agencies, there are inevitably a few applications that contain inflated income details.
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