Even though self-cert mortgages took a bit of a public battering at the hands of the national media a few years ago, the product continues to be successful and remains an important option for many borrowers. To understand why self-cert remains so popular you have to clear away all the controversy and misconceptions – in particular the tabloid-style headlines suggesting that many brokers and borrowers were using the product to fraudulently obtain bigger mortgages than they could really afford.
First of all let’s look at some facts and figures about the sector; information compiled by organisations outside of the mortgage industry, and therefore without an axe to grind.
Esteemed market research organisation Datamonitor says that currently around 55 per cent of self-cert customers are self-employed workers. In addition to that, Datamonitor says that a further 34 per cent of the sector is made up of contract workers, agency staff and seasonal workers. That means that 89 per cent of the market – almost nine out of 10 borrowers – are people that fall outside of traditional employed status because of working patterns or incomes.
Also, according to Datamonitor, almost 13 per cent of the UK workforce is self-employed, with the total running at nearly 3.8 million people by the end of 2006 according to government figures – almost 100,000 more self-employed workers than the year before. That’s the highest number of self-employed entrepreneurs in the UK ever, and growth does not look like slowing anytime soon.
Reasons for growth
There are many reasons for the increase in self-employed people. For example, although the number of redundancies in the UK is falling, there were still over half a million job-losses last year. Re-employment rates typically run between 35 per cent and 45 per cent, with older workers in particular finding it harder to secure new jobs. So for many people starting up a business, it’s the only option.
Taxation changes for smaller businesses and easier rules relating to the setting up of a limited company have both made self-employment more attractive to many people. In addition there has been a move towards so-called ‘interim workers’ – usually highly experienced professionals taking on senior roles on a short-term basis, as well as the traditionally thriving sector of contract and temporary employees working in sectors as diverse as IT and finance through to the building trade.
In addition to the self-employed and contract workers, employment patterns are a major factor in another group of self-cert borrowers – those people that have more than one job. This is often known as portfolio working, which sounds very sophisticated, yet often many workers in this group are holding down two, three or more jobs just to earn a decent income. Some of those jobs could be part-time or casual, such as the person who finishes his day job and then pulls a night shift driving a taxi, so proof of income can be difficult.
Other typical self-cert borrowers include people on low salaries, but who regularly earn large bonuses; directors who wish to keep their financial affairs private from fellow directors; and high net worth clients with complicated income streams.
On that evidence alone the vast majority of self-cert borrowers are not trying to buck the system, but are actually normal people with somewhat out of the norm working practices or income streams. It is estimated that the self-employed and borrowers with non-standard working patterns alone account for almost half of all the customers in the specialist lending sector, which in itself makes up more than 20 per cent of the entire UK mortgage market. These are people who, quite frankly, have been let down by the mainstream mortgage lenders.
High risk?
Many mainstream lenders see the self-employed and those with non-traditional working practices as too much of a high risk and often will not give them a mortgage unless their business has been running for at least three years, and even then they will not lend unless they have audited accounts as proof of income. That is why self-cert has become such a popular product for this kind of borrower.
Analysis of figures reveals some interesting patterns. According to the Council of Mortgage Lenders (CML), the average loan for a first-time buyer is around £98,000, rising to £120,000 for movers. This compares well with Kensington’s own figures that show the average loan amount across our business in 2005 was about £117,000.
When it comes to our self-employed customers, however, the average mortgage figure rises to more than £140,000, so on this basis we can predict that the self-employed are likely to borrow more than their employed counterparts. This is further reinforced by figures that show that the average self-employed borrower is aged 41 and earns an average of £49,000 a year, almost double the average UK wage.
So rather than being a high risk group of customers on the margins of society, these figures prove that the self-employed, and therefore the vast majority of self-cert customers, are responsible and successful people simply looking for a good mortgage.
In reality self-cert customers pose hardly any more risk than employed borrowers in the mainstream sector. The major difference is that a bit more time is required with the underwriting process and a more pragmatic approach to the customer’s circumstances is also needed. This is, of course, difficult for many mainstream lenders who have moved to automatic credit checking, or indeed those that have not had experience of specialist lending situations, and therefore do not understand the realities that self-cert customers face.
Take the requirement for three years’ books that most mainstream lenders demand as an example. Having a track record of successful trading is proof of historic income, but it is no guarantee that the self-employed person will maintain that income in the future. That will be influenced by less tangible factors, such as the person’s skills and experience of their business sector.
A lender experienced in these circumstances will be able to take such issues into account when underwriting a mortgage. Given that experience, approving a home loan for a self-employed person on day one of their new business is actually no riskier than giving approval when their firm has been up and running for three months or three years.
Alternative option
However, it is not just that self-cert is usually their only option. The way the modern self-certification mortgage has developed, the product is often better than a mainstream mortgage for the self-employed and similar workers because it has been designed to meet their needs and the way they earn their living.
Some of the newest self-cert products on the market have been specifically designed with the self-employed, contract and temporary workers in mind. Mortgages that are available from day one of the borrower’s newly self-employed status, for example. Other benefits including flexible payment options, so borrowers can make overpayments without penalty.
Overpayments can also go towards building up a ‘payment pot’ that can then be used to make underpayments, perhaps when business income is not so strong, or even take payment holidays, ideal for contract workers and seasonal businesses.
Of course self-cert mortgages do need to have strong responsible lending criteria and systems in place.
We have strict self-cert criteria that our broker and packager partners must adhere to. As well as full disclosure, we need to insure that those declarations are reasonable when crosschecked with the applicant’s details, such age, type of occupation and time in that industry. In around three quarters of the self-cert applications that Kensington approves, we carry out post completion counselling to ensure that the borrower received best advice, they are aware of their responsibilities, and of course the mortgage is suitable for them. These checks are vital for the financial safety of everyone involved, from the lender and the introducer through to the potential customer.
But it is clear than that despite the odd rogue case that stokes the media furore and makes self-cert an easy target, the reality is that the product serves the needs of a growing number of customers. More to the point, when handled responsibly, self-cert presents no more of a risk than any other mortgage in the market.
