Self-cert mortgages

Criteria tightened across the market

All parts of the mortgage market have been affected by the credit crunch, but self-cert lending has been hit more than most by the lack of financial liquidity, as lenders deem self-cert borrowers to be in the high profile subprime category.

Self-cert mortgages are specialist home loans where the borrower does not have to prove their income. This traditionally meant the lender would accept an application where the borrower states their annual earnings without seeking to verify this, you do not need to provide payslips or accounts. However, the recent financial turbulence and greater fears of losses mean lenders are now looking more closely at self-cert applicants.

Self-cert mortgages are ideal for the self-employed, who do not have payslips and may not have the three years’ worth of audited accounts that lenders usually require.

For example, a start-up business or a sole trader who does not have fully audited accounts might find it difficult to get a mainstream mortgage. In addition, many self-employed people minimise their income (in full accordance with Generally Accepted Accounting Practice) to decrease their tax liability.

This means that on paper the self-employed can often seem worse off than they truly are. A mainstream lender may not be willing to offer a self-employed borrower a mortgage at a size that they could in fact comfortably afford.

But it is not just the self-employed that use self-cert mortgages. There is a growing army of contract workers in the UK, particularly in fields like construction and IT. While some of these may not strictly be self-employed they may still have problems proving their income if they work in short lucrative spells for different companies over one year.

Those with more than one source of income can also face problems getting a mortgage on the high street, particularly if one income doesn’t come from a job but from a trust or divorce settlement for example.

In addition, many employed people use self-cert mortgages. Salespeople and others who work on commission, or have variable incomes may find it difficult to secure sufficient lending based on their basic salary alone.

Employed borrowers might use a self-cert mortgage if speed is of the essence. Because the lender does not verify income self-cert mortgages can go through more quickly with few hold-ups, subject to valuation. In some cases it may be essential to have a mortgage arranged quickly, such as if you are buying at auction.

Self-cert mortgages help many people to get a mortgage at the level they can afford without jumping through hoops imposed by mainstream lenders. While the criteria on the high street may suit most people, many fall outside of it and may only be able to buy a property with a self-cert loan.

But self-cert mortgages are specialist and by nature higher risk than mainstream borrowing. If the lender doesn’t check the income there is an increased risk that the borrower may not be able to afford repayments and therefore default on their mortgage. Lenders have to price for this risk which means self-cert deals are more expensive than mainstream mortgages. They also carry different criteria, for example deposits may need to be larger and fees can often be higher.

The credit crunch has meant that there are now fewer lenders in the market. This is not so much because of a particular problem with self-cert lending but because many specialist self-cert lenders were also heavily exposed to the subprime market. A significant number of specialist lenders have exited the UK market or closed down altogether.

Criteria have also tightened in self-cert lending, as across the market. This is why obtaining professional specialist mortgage advice is crucial and could be the difference between being able to purchase a property and losing out.