Not many people would suggest that self-certification mortgages have had an easy time of it in recent years. Held up by some parts of the media as an example of the worst kind of irresponsible lending and under investigation by the Financial Services Authority (FSA), you could be forgiven for thinking the market for self-certified mortgages was waning. But the industry tells us a different story – self-cert mortgages are more popular than ever before. As demand rises, lenders are becoming increasingly competitive with the products they are developing.
According to the Economic and Social Research Council (ESRC) more than one-in-ten employees in the UK now class themselves as self-employed. This equates to over 3.7 million people. Datamonitor predicts growth of an average 4.7 per cent a year, at least until 2009. After a couple of years of uncertainty, lenders and intermediaries are raising their game to ensure they have the right products and services available for current demand and future growth. Can the market sustain these growth levels? Is self-cert really the saviour of the specialist market?
Behind the growth
A self-cert mortgage enables a borrower to declare what his or her income is, but is not required to provide proof. Self-cert mortgages were designed to cater for people who are self-employed and have difficulty in showing their earnings are enough to make the payments on the mortgage they are applying for. This could be because they have not been trading long enough, they have more than one job, or they rely on bonuses for a large part of their total pay.
Why has the market for self-cert or ‘non-status’ mortgages grown? The increase in popularity is down to a number of reasons. For instance, entrepreneurship and self-employment are being encouraged by the government with special tax incentive programmes. However, the increase in demand is primarily due to changing work practices in the last couple of decades that have resulted in a larger number of people on short-term or part-time contracts, or dependent on bonuses for a large portion of their income. An increasing number of people have decided to take the plunge, leave the relative security of being an employee and go it alone. Self-cert mortgages suit the increasingly flexible working population whose income can vary over the course of the year.
Sophisicated
As the demand continues to increase, risk models are becoming more sophisticated as lenders begin to understand more about the marketplace. Lenders are also becoming more innovative and developing a range of competitive products, designed especially for this flexible, niche market.
As the number of lenders offering self-cert products grows, borrowers have never been in a better position and now have more choice than ever before. By the end of the year, any risk-averse lenders not operating above 85 per cent loan-to-value (LTV) levels or at 90 per cent self-cert may find themselves marginalised.
Lenders are recognising that self-cert borrowers are not necessarily a greater risk, Indeed, many borrowers, who go on to be excellent mortgage customers with specialist lenders, routinely fail credit scoring processes with mainstream lenders. Arrears on self-cert loans certainly compare favourably with other mortgages.
The key to the success of the self-cert market is the assessment of affordability. Specialist lenders have blazed the trail in this area with their increased use of affordability models. As with any mortgage application, it is down to the broker to ensure the mortgage is suitable for their potential borrower and they can afford to meet the monthly repayments. It is also down to the broker to remind their customer that information provided on a mortgage application must be truthful and accurate and knowingly giving false information on a mortgage application form is fraud.
Commitment
We are one of many lenders committed to the self-certified market. We restrict our self-cert lending to those who are self-employed. Many sole traders have a track record but don’t have the documentation to prove it. A self-employed hairdresser or taxi driver won’t want to pay an accountant to do their books simply to prove third party confirmation to a lender. If they have an existing mortgage and have managed it adequately, this gives us a track record. It is logical that the bigger the mortgage, the more verification is required, but it’s as much about protecting the borrower as the lender.
We, along with a number of other specialist lenders, recognise simply because someone has a number of income streams, this doesn’t necessarily make them less likely to be a responsible borrower. Self-cert isn’t there to help people exaggerate their salaries but to help people who have what might be considered non traditional streams of income.
In fact I believe scrutiny of the market actually helped to ‘legitimise’ the product and discouraged any irresponsible practices that may have been occurring. Lenders, brokers and customers were forced to clean up their act and educate people as to how self-cert products can really work responsibly. Continuing regulatory attention, combined with advances in risk assessment has demonstrated that self-cert is not a tool to lend irresponsibly or for a customer to borrow more than they can afford.
With the more competitive and generous lending available, with products at 85 per cent or even upwards of 90 per cent LTV on offer, lenders have done a great deal to make this market more attractive and accessible to self-employed borrowers, without increasing the risk of over indebtedness or irresponsible lending.
Self-cert mortgages have played a major role in driving the success of the non-conforming market. Admittedly, they had had more than their fair share of critics, but overall, the outlook is positive for self-cert mortgages.
