self-certification mortgages are shedding their image as the industry’s dirty secret thanks to better advice and increased awareness. But this useful, and necessary, tool in the box of mortgage-borrowing tricks still needs to be used with utmost care, experts warn.
The idea of self-certification – allowing a would-be borrower to state their own income without written proof – is a product of the changing employment market. No longer are we largely a nation of workers with a ‘job for life’. Instead the UK workforce has become a nation of dynamic, often self-employed, income seekers for whom the traditional idea of a monthly salary is no longer relevant.
“Self-certification was originally developed for the likes of builders and shopkeepers – people who worked for themselves, and who earned good money but didn’t always have the salary slip to prove it,” explains David Mead, managing director of Edenbridge-based advisers Flexible Mortgage.
He continues: “Now, of course, you are seeing more and more professional people who don’t earn money in what would be considered the normal way.”
Mead estimates there are ‘at least’ four million self-employed people in the UK. “Add this to the growing number of people who earn money through an additional job or income and you have an awful lot of people whose income cannot be quantified.
“That’s not to say these people are not taking home a good income, in the case of a city worker an annual bonus that can go into six figures.”
Most lenders are still extremely reluctant to allow those with apparently unreliable sources of income a mortgage, and that’s when self-certification comes in, allowing these would-be homeowners the option to state how much they expect to earn and borrow on that estimate.
A ‘dodgy’ concept?
But what sounds like a great concept to some, can to others – particularly regulators – sound ‘dodgy’ admits Linda Will, managing director of Accord Mortgages.
“The concept can appear, to a non-adviser, to seem as if it give carte blanche for people to say what they earn,” admits Will.
The image of self-cert as a ‘dodgy’ way of getting a mortgage was not helped when it became the subject of a BBC programme in 2003. This now infamous exposé gave self-cert a bad name, claims Will.
“That programme was meant to highlight bad practice, but what it has done is highlight that you can, if you are unscrupulous of course, lie about your income to get a mortgage.”
She adds: “The BBC programme, in effect, educated people about self-certification whereas previously the awareness of self-certification, quite rightly rested on the broker.”
Will says there have in fact been very few cases of self-certification fraud. “The programme did blow things out of proportion,” she explains,
“With any financial product you are going to get a very small minority who will misuse it. Self-certification is no different.”
Self-certification has attracted the attentions of the Financial Services Authority (FSA). It investigated sales involving self-certification last year after receiving anecdotal evidence that it was being misused.
Robin Gordon-Walker, FSA spokesperson, says there was no evidence of large scale fraud. In fact, Gordon-Walker admits even the FSA was surprising by its own findings. “We had anecdotal evidence that would have suggested we would have found a few inappropriate sales. Our investigations discovered quite the contrary, there were, in fact, very few.”
Record-keeping
What the FSA did find was that advisers were not keeping very good records of their self-certification-related sales.
“We discovered a mixed picture in terms of record-keeping. That, of course, is important if at some later stage someone was to prove that they had been sold an unsuitable product, but we did not find evidence of many unsuitable sales.”
But just because self-cert has not made it into the FSA’s bad books, in the same way that sales of non-conforming mortgages did in a mystery shop last Autumn, doesn’t mean intermediaries and advisers can afford to be complacent.
Gordon-Walker says: “In half the cases, the adviser could give evidence to demonstrate to why self-certification was the most appropriate tool.”
He warned that if advisers failed to demonstrate better record-keeping, self-cert might become the subject of a future FSA investigation.
“Just because we are not following any specific themes doesn’t mean it’s off our radar,” he warns. Will also admits that advisers are notoriously poor at record-keeping. “As lenders we do try and help, but for some it’s an uphill struggle,” she says.
Advisers are of course adamant their record-keeping skills are up to scratch.
Rod Murdison, owner and chief adviser of Murdison & Browning, blames regulation for confusing some mortgage intermediaries and leaving behind some of the self-certification safeguards used during self-regulation.
He explains how the removal of the obligation to fill out a ‘reason why’ letter may be to blame for the FSA’s findings. Murdison says: “After ‘Mortgage Day’, advisers were under no obligation to fill in a reason why letter and I think the scrapping of that formality, along with the introduction of regulation generally, may have meant records are not being kept up-to-date as well as they should be. That doesn’t mean advisers are not carrying out extremely valuable and suitable self-certification sales.”
Murdison, says his network, Sesame, insists its members continue to fill a version of the previous reason why letter.
“Sesame still insists that we fill out what is the equivilant of the reason why letter and it does help focus your mind when you are considering using self-certification.”
“I can imagine some smaller intermediaries or those who do not do much mortgage business might not be so thorough.”
Turning to packagers
With the Council of Mortgage Lenders (CML) claiming that use of self-certification is growing, advisers will have to get their paperwork act together. And packagers may find themselves the mortgage advisers’ new best friend, claims Paul Hunt, head of marketing at Platform, the specialist lending arm of Britannia.
He says the more clients that require bespoke mortgages, the more intermediaries will need to turn to packagers for assistance.
“Before regulation, people had written off packagers, but now we are finding business especially self-certification is really growing.”
When someone doesn’t fit all the right boxes, advisers need to spend more time on their client’s mortgage application.
He says: An outsourcing service is very valuable if an adviser really wants to make sure they are following the rulebook as well as getting their client the most suitable mortgage deal.
“Of course we get used by IFAs who only sell a few mortgages, but we are also being used more by mortgage intermediaries who want to make sure their self-cert clients are getting the best deal.”
Hunt’s mantra is that all advisers need packagers and that more will do so.
“If you only have two or three difficult cases a month you will use a packager, but with self-cert and even non-conforming the products start getting more specialist even the best mortgage adviser might not be able to keep track of every single product. They give clients and intermediaries more options.”
Mortgage packagers do apparently have the administration and compliance checks in place that would appear to prevent fraudulent cases slipping through the net.
“We will do a suitability and affordability test before we even send the application off to the lender. With such a large number of people either self-employed or having a second income we must ourselves be satisfied that all applications are sound.”
Platform’s own research would point to the importance of packagers. In a poll of over 200 mortgage intermediaries and financial advisers, 18 per cent say they expect the amount of self-certification business they submit to packagers to increase in the next 12 months.
Murdison agrees that packagers will play an increasing role, but he believes use of self-certification would not be quite so necessary if lenders updated their lending criteria.
“It has not kept pace with the times,” he says.
“For example, when I was first in the industry, interest rates were three times what they are now and lenders would lend 3.5 times someone’s salary. Now the amount of money that borrower would pay is three times what it is now, even bearing in mind the rise in house prices. But yet lenders still insist on the three and half times multiple.”
If lenders were less strict on multiples, Murdison says advisers would not need to revert to more ‘creative’ ways of helping clients borrow. But he admits it’s unlikely the multiple ‘fixation’ will end any time soon. He says: “
The multiple is so easy to understand that lenders, brokers and the public have been loathe to let go of it.”
The future of mortgages?
The very future of mortgages may lie in the take-up of self-cert. The more lenders that enter the self-cert market, the more practices may have to change. Offsetting, and over and underpayments have all shown how flexible the mortgage market can be, claims Murdison.
“It is a question of where do we go now? Do we make all mortgages based on affordability rather than multiple-of-salary based? A mortgage borrower paying 15 per cent interest a decade ago was completely acceptable to a lender.”
For the meantime, in lieu of any new ways of calculating potential borrower, self-cert will continue to be based on the trust between lenders, borrowers, and their advisers. Murdison says: “People have to be responsible for their own lending – they are the adults and they are the ones having to make the monthly repayments on the mortgage. We are only their brokers and we can only hold their hands so far.”
“But if someone has been regularly paying rent of £1,000 for three years then they can afford a mortgage. I’d have no difficulty in self-certifying cases like that.”
For mortgage lenders the responsibility of a good self-certification sale rests on the shoulders of the adviser, regardless or not as to whether someone can afford it.
Will adds: “We do believe advisers are becoming more responsible. There’s been too much negative press and it’s all wrong. Advisers are doing their best to make sure people are earning what they say there are.”
“For example, we had a case recently where someone had three jobs, a very good example of how self-certification can help people with diverse, and very diverse at that, sources of income.”
“This gentlemen worked three days a week in a normal admin job, he also had a job playing in a band twice a week and during the weekend ran an internet cafe.”
"We were 100 per cent happy with this and gave him the mortgage. The adviser, of course, did a very good job at verifying all this and speeding along the application.”
“We have noticed from our focus groups that mortgage advisers are well aware of their responsibility in making sure self-cert remains as controversy-free as possible.
“The real test is that if a client comes in and actually looks for a self-cert mortgage, the chances are they are not earning enough. Clients very rarely come in actually asking for these mortgages. Advisers we speak to believe that’s the best way of sorting out the potentially fraudulent cases from the genuine ones. Nobody actively seeks to self-cert.”
Mead agrees: “A potential client who comes in asking to self-cert is normally one who I wouldn't trust.”
As a responsible adviser, Mead says the most basic part of a self-cert application is making clients write out a budget.
He explains: “You can normally tell when someone isn’t being that honest and lenders will spot that too. If you’ve got a postman who comes in and says he’s earning £60k, it won’t ring true.”
“People don’t have an automatic right to a mortgage – they have to prove they can afford it. All self-cert is doing is allowing those who can’t prove it through orthodox means to take out a mortgage.”
“If I get a client that I’m not sure about I’ll normally pass, or ask for their accountant’s details.”
