If youre self-employed, the rising cost of homes isnt the only obstacle you might face when trying to get onto the property ladder. Traditionally, lenders have also been reluctant to advance home loans to people who cant prove their income, and if youre newly self-employed, that proof will be hard to come by. But times have changed the number of self-employed people is on the rise, and this has helped boost the profile of one of the more specialist areas of the mortgage market: self-certification loans.
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This is a steadily growing market, largely because of lifestyle changes as increasing numbers of people decide to work freelance or take on more than one job, perhaps in order to balance out family commitments, says Sally Thomas, marketing manager for consumer lending at Bank of Ireland in the UK, which owns the Bristol & West and Giraffe brands. Research from the Office for National Statistics bears this out: since 2001 the number of self-employed people in the UK has risen from 3.28 million to 3.83 million, an increase of 16.7 per cent.
The term self-certification means exactly what it says borrowers certify that their income is sufficient to repay the loan they are applying for, without having to produce documentation to back this up.
Self-certification is typically geared towards the needs of those whose income varies from time to time, or who are on incomes that include bonuses or commission, or who receive income from multiple sources, explains Keith Astill, managing director of UCB Home Loans, a self-cert specialist lender. They are typically suitable for the self-employed, especially those who have been trading for less than three years, because conventional lenders usually require three years accounts.
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Even with a self-cert loan, however, it doesnt follow that borrowers wont have to provide any documentation. People sometimes think taking out a self-cert loan means no checks at all will be carried out but this is not true, points out Ray Boulger, senior technical manager at mortgage brokers John Charcol. Self-cert lenders carry out all the usual checks on credit-worthiness and borrowers still have to prove their identity to comply with anti-money laundering laws. And they still have to declare their income on the application – they just dont have to prove it.
There are precious few other differences between self-cert and standard mortgages borrowers can still choose between fixed, discounted and tracker rates, and can opt for flexible loan terms. There are still arrangement fees and early redemption penalties on some loans, and the products are available from a wide range of lenders, both directly and through intermediaries such as mortgage brokers.
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Conditions of lending also tend to be the same, as Thomas points out: The lending criteria for our self-cert loans are the same as for our other lending: 4.5 times the first income plus one times a second income, or four times a joint income. The only real difference is that self-cert borrowers must be at least 21, whereas standard mortgages are available to anyone over 18.
The amount you can borrow (the loan to value or LTV), however, may well depend on your individual circumstances. If you have been self-employed for several years and you can show a steady and regular income, you are likely to get a higher maximum LTV than if you have only been self-employed for a few months. UCB Home Loans has a maximum LTV of 85 per cent on its self-cert loans, for example.
Going rates
The one area, other than proof of income, where youre likely to see any real difference between self-cert loans and standard mortgages, in fact, is the interest rate. Historically, the rates available on self-cert loans have been much higher than on standard loans to reflect the greater risk to the lender of the borrower defaulting on the loan.
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But rates have been falling and becoming much more competitive. Boulger reckons there are two reasons for this. First, more lenders started offering self-cert loans, he explains. And that had the effect increased competition always has: it drove prices down. The second reason is that more and more mainstream lenders are now operating fast track systems where they use a borrower’s credit score as the basis of the loan application, without requiring any further income details. Lenders have found that a good credit score is an excellent predictor of a borrower’s willingness and ability to repay, and the better the score, the fewer further checks are needed. LTVs tend to be lower usually a maximum of 75 per cent – but this still means many borrowers who would otherwise have opted for a self-cert loan can instead choose a fast track standard loan, which tends to have lower interest rates.
The knock-on effect for self-cert from this is that the market has had to lower its rates to compete with fast track – self-cert borrowers needing smaller loans would otherwise have simply defected to fast track lenders.
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Whether you should buy a self-cert loan off the shelf or through a broker is a matter of hot debate. Thomas believes it is not necessary to buy via an intermediary and points out that Giraffe loans, for example, are only available direct.
But Astill thinks the complex nature of self-certification mortgages makes it worthwhile going to a broker to get advice. The broker will know the best deals in the market, what a lender requires when assessing your application – and whether or not self-certification is actually needed, he says.
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Unsurprisingly, Boulger also falls into the pro-broker camp. The self-cert market is very broker-dominated: although several big lenders sell these loans, they dont always offer them direct. Nationwide, for example, sells self-cert loans through UCB but if a borrower were to walk into a Nationwide branch and ask for details of a self-cert loan, I don’t think he or she would be directed to UCB. I think he or she would just be told, Sorry, we don’t sell them.
Certainly, self-cert customers are more likely to use a broker because it’s more likely they will need advice even if that advice ends up pointing out that they dont need a self-cert mortgage. The broker might have good reason to believe the customers credit score would be excellent, in which case he or she might fare better with a fast track arrangement.
Using a broker is simply a better option because it makes the whole market available, provided you use an independent broker, of course, concludes Boulger. You don’t want to use a broker who works from a panel.
