Self-certification mortgages were launched in the marketplace to help people who have what might be considered a non-traditional stream of income. This would include those that are self-employed, have less than three years of business accounts and those people with numerous income streams. They are mainly aimed at borrowers in the market that cannot, or choose not to, verify their income.
Constant evolution
The niche market of self-certification has been evolving since its outset in the 1980s. A report issued by Datamonitor estimated that the market was worth £11.8 billion in 2005. This report included figures stating that the market of self-certification grew at an annual average rate of 29.7 per cent for the years 2000 to 2004. The FSA later reported that the self-certification market accounted for approximately 6 per cent of the entire mortgage market. This has mainly been the result of an increase in the number of self-certification consumers, increased confidence in the market and an enhanced product portfolio.
When a borrower takes out a mortgage loan, lenders usually require a proof of income, in the form of pay as you earn (PAYE) pay slips from their employer or certification from an accountant. Self-certification mortgages, however, allow the borrower to self-certify themselves. In this way, self-employed borrowers can sign an income declaration form that confirms their ability to make any necessary loan repayments from their income without the usual documentation requirements.
Pace of growth
The self-certification market is growing at a much faster pace than mainstream mortgages due to the rising number of people in self-employment who are having problems meeting the traditional lending requirements. In a recent report by My Mortgage Direct, it was found that many organisations were offering their staff short-term contracts to avoid providing them with any extra benefits, such as pension and health schemes. This means that more people no longer work a traditional nine-to-five and are in need of an alternative mortgage option when they want to buy a house.
According to quarterly figures compiled by the Office of National Statistics, the number of people in self-employment, and therefore eligible for a self-certification mortgage, in the UK throughout the period March to May 1986 was 2.8 million. In the past 20 years there has been a 25 per cent increase in the number of people in self-employment. In the period July to September 2006, the number of people registered as self-employed in the UK was 3.8 million. This boost has meant an increasing market to target for niche specialist lenders.
Today, self-certification mortgages are available through a variety of non-conforming specialist lenders and the deals being offered are becoming increasingly competitive with facilities of up to 90 per cent loan-to-value.
Competition and regulation
Approximately 30 per cent of UK mortgage lenders now offer a self-certification product. Specialist lenders that have entered the market of self-certification in the past year include Personal Touch Financial Services, Southern Pacific Mortgage Limited, The Mortgage Business, Bank of Scotland, Amber Home Loans and Kensington Mortgages.
This is great news for borrowers as lenders continue to move into the sector, resulting in further competition, innovation and much more competitive rates.
GE Money Home Lending (GEMHL) is committed to the self-cert market, and has also developed a competitive product portfolio designed especially for this niche marketplace.
One of the more recent products we have launched is our self-certification product for secured loans. This is being offered within our First National range and enables customers to self-certify their income up to £60,000.
As there are so many different products on offer from numerous lenders, the market has become heavily regulated. In 2003, issues of income fraud were being reported within the self-certification market, where lenders were supposedly telling borrowers to overstate their income. This led to FSA regulation of the market and the requirement of entire documentation, stating the reasons why a borrower needs a self-certification as opposed to a conventional mortgage. The FSA subsequently issued guidance notes to ensure brokers are fully aware of all requirements before they advised borrowers on self-cert products.
The more lenders that enter the market, the more regulated the market will become, leading to a possible change in practices. With today’s market becoming ever more sophisticated, self-certification is likely to be a big driver in the future of specialist lending as the range of products on offer constantly evolves. Self-certification is, therefore, servicing those customers who need it while also developing new ways to broaden its scope and take on new borrowers from other markets.
The future of self-certification looks set to continue growing at a rate around 8.1 per cent a year until the end of the decade. Datamonitor also reports that the market is estimated to reach £17.4 billion in 2010.
We have seen numerous high-street lenders move into the non-conforming market and it is likely that, as the demand for self-certification continues to rise, we will see self-certification product ranges expand and more lenders moving into this market.
Duncan Berry is director of sales, first mortgages at GE Money Home Lending
