Self-certification mortgages are not so much mortgages in themselves but more a way of applying for a mortgage. Waters have been muddied more recently with fast-tracking – but there is a distinct difference.
Fast-tracking a case makes perfect business sense, for the broker, the client, and the lender – a lender will allow a clean, low loan-to-value (LTV), good quality application, which has been through some basic plausibility checks, to be processed with minimum documentation requirements. But this is fast-tracking and not self-certification – and the lender does, of course, reserve the right to perform spot checks on these cases.
One step further
Self-certification goes one step further in that the client, by stating their income on the signed application form is self-verifying the information. It’s designed for self-employed clients or people with incomes from different sources – anyone that would normally find it difficult to produce all the traditional proof of income documentation required under mainstream lending. This is not to say a sanity check isn’t performed by the lender – it will ask itself whether the income declared actually fits the employment type – but the key here is that they have asked the consumer to confirm that the stated earnings are correct.
The need for lenders to offer this type of flexibility on applying for mortgages will only grow, as working patterns are continually evolving. Numbers of self-employed are increasing and many more people are choosing to take contract work – within the IT and media sectors especially. We are also seeing more people trying to achieve a more favourable work/life balance through part-time work or flexible hours.
First step
Getting a mortgage in the first place is just the first step. The very nature of bonus based income or contract work will invariably mean that the customer is likely to have a fluctuating income and would benefit from flexibility around actually paying off their mortgage – this is where a flexible or offset self-certification mortgage product comes into its own.
A flexible mortgage gives the customer the option of taking a payment holiday or underpaying on their monthly mortgage payment when inbetween contracts or, if they are self-employed, when they get to the point (as we all do) that they need a well-earned holiday. Or conversely, when times are good they could make overpayments – with an offset mortgage the overpayments made sit in a separate pot within the mortgage. This can be used to offset their mortgage interest payments, saving money in the long-term.
It makes sense to make overpayments when times are good and benefit from the offsetting of interest during the year. At the end of the financial year the money in this ‘pot’ could also be used to foot the income tax bill.
For example,
Daniel Sykes is a self-employed sound recordist, he takes out a £100k offset mortgage to pay for £250k house, and has to pay £462.50 a month on a 5.55 per cent self-cert offset mortgage (at Base Rate plus 1.05 per cent for term), with a 15-year term on an interest only basis.
He gets a payment of £10,000 at the end of a contract in January, which he pays into his mortgage. This means that he only has to pay interest on £90k of the mortgage, reducing his payment to £416.25.
He gets another £15,000 at the end of a contract in July, which he also pays into his mortgage.
Dan is now only paying interest on a £75k loan which is just £346.88.
In December, he and his girlfriend decide to take a much needed break for a month. They take a payment holiday and draw £5,000 out of their offset mortgage savings pot to live it up in Antigua for a fortnight.
As this is a maturing market the products offered by lenders have started to take on many of the characteristics of mainstream lending products. This trend will continue with narrowing margins and changes to criteria such as larger loan sizes, higher LTV limits and moves to affordability calculations rather than income multiples.
We may see regulatory tightening which will shape the whole market and there will be new entrants to the market who will invariably raise the game on pricing. However the lower price game cannot be sustained indefinitely and energies will shift again to developments around criteria, service and technology.
