After a year of slow but steady growth, the self-certification market now stands at about £20bn – a sizeable and established part of the overall mortgage market. It clearly serves a client need, which is not met by mainstream offerings, and there are a number of reasons for its enduring popularity. These include changes in the UK labour market; increasing numbers of self-employed workers, more flexible working patterns, the use of short-term contracts and commission-based salaries. Also, people now have to use all forms of income such as tax credits, part-time work and bonuses to be able to afford their place on the housing ladder. On the other hand, regulation and the promotion of responsible lending have undoubtedly had an impact on self-cert figures. Overall, 2006 should see an adjustment in lenders’ approach to the market.
Responsible lending will have to be promoted along with product benefits, and there should be a sharper focus on ensuring intermediaries and clients have access to the best possible support when it comes to applying for a self-cert mortgage.
Market development
A lender keen to develop its presence in the self-cert market will need to promote its benefits to a wider audience than those who have traditionally made up this sector. As well as the increasing number of people choosing to be self-employed, there is a growing need for this kind of product in the employed sector. More people than ever have second jobs and multiple sources of income on top of their PAYE salary, such as child benefit, tax credits and investment income. Other employed applicants may have fluctuating incomes due to the seasonal nature of their work, they may rely on high levels of commission or they might be contract workers. A combination of more flexible pay and working patterns and increasing house prices means that people need to maximise their income and make use of any money at their disposal to obtain a mortgage. Standard mortgages tend not to take account of income outside of salary, which means that some PAYE clients will be disadvantaged – self-cert can potentially give them the product they need.
Pricing
Deals which run over two years, particularly if they are offered at a fixed rate, have always been popular in the self-cert market. This popularity is driven by the fact that many borrowers can’t provide documentary proof of all their income at the time of application, but are in a better position to provide all the necessary paperwork when the deal ends. Inevitably they will take advantage of this and make the most of their opportunity at the end of the term to look for a better rate of interest. So it seems clear that two-year deals are likely to continue to be the best sellers and major contributors to many lenders’ new business levels. This presents lenders with the issue of retaining clients once the two years are up, which means that creative pricing comparable with mainstream rates will become increasingly prevalent.
Canny lenders will also consider the possibility of pricing for risk. Essentially, this means deciding on prices according to LTV, income multiples, credit scores and so on. It is already evident in the market that LTV pricing is becoming popular. Because of the lower interest rates on offer for lower LTVs, clients are able to directly benefit from house price increases or simply by having a large deposit at their disposal.
Criteria
The self-cert market currently lacks the segmentation opportunities of its industry counterparts such as buy-to-let. So lenders will have to rely on product development through criteria, rather than the introduction of new ‘niche’ self-cert offerings.
Increases in LTV levels and a shift from using income multiples to loans based on affordability are also likely to be on the agenda. Opinion is still divided on multiples versus affordability, though there are advantages to each method. Some lenders, such as Mortgage Express, prefer the transparency and simplicity of using income multiples whereas others have adopted affordability calculators, or other approaches such as net disposable income.
Regulation
According to the Council of Mortgage Lenders (CML), the jury is still out on regulation and its benefits for customers. So as we wait for the results of the FSA’s review later this year, we must assume that it has been a positive step. With the help of regulation, proper selling guidelines and trade body support, there is no longer a need for intermediaries to shy away from recommending self-cert cases. There is a real and justified need in the market for self-cert mortgages and this, coupled with a safer selling environment, should help to overcome any hesitation. The comprehensive guidelines should ensure that the sales process for self-cert mortgages is as secure as any other.
However, there are still some brokers who need to improve their record-keeping, including being able to show why they recommended a self-cert case as well as providing comprehensive audit trails.
From a lender’s point of view, responsible lending is of utmost importance and therefore it is vital that any information the intermediary can give to support their self-cert applications is provided at the earliest possible stage. Not only does this ensure the intermediary has a full and accurate record from the start, it also helps speed up the application process. For example, if appropriate, intermediaries should provide explanations about how a client’s income is earned and details of second jobs and other income.
The Intermediary Mortgage Lenders Association (IMLA) recently highlighted Treating Customers Fairly (TCF) as a key theme for 2006, and it’s reasonable to anticipate that its principles will be high on all trade bodies’, lenders’ and brokers’ agendas. We can expect TCF to govern all product, market and sales developments, which in turn should see further improvements in overall standards.
None of us can become complacent about record-keeping, audit trails, responsible lending and TCF. These are vital in an environment where we need to be able to demonstrate the value of self-cert in our industry.
Service and technology
Brokers tend to need additional support when it comes to recommending self-cert. Inevitably this generates more calls to contact centres than for other products. Many lenders have noticed this trend and in response have enhanced their online offerings to give introducers access to up-to-the-minute product information, advice on filling in the application form and real-time services such as case tracking. These facilities are proving to be very popular with introducers and ultimately they reduce calls to the lender or business development manager. Enhanced versions of case-tracking, such as Mortgage Express’, give the broker more detail. For example, rather than simply stating ‘valuation instructed’ or ‘references outstanding’, brokers are now provided with times, dates and specific documents outstanding.
Other developments include the introduction of binding DIPs that guarantee a decision, which are proving to be very popular because they speed up the client’s access to mortgage funds. Though not a new idea, brokers appear to be viewing cascade underwriting as an increasingly attractive way to do business. Applications are ‘cascaded’ through a lender’s range of products if they don’t meet the criteria of the first mortgage applied for. This obviously saves time for both the broker and the client – though they may have to pay a premium for the privilege. However, cascading should only be used in conjunction with ‘traditional’ searches for appropriate products and informed, professional recommendations – particularly with self-cert, which arguably attracts a greater degree of scrutiny than other market areas.
Self-cert faces a steady future. It’s an attractive product to a growing client sector, and regulation has caused lenders and brokers alike to ‘raise their game’. This can only benefit the client, whether self-employed or PAYE.
Emma Paine is product development manager at Mortgage Express
