'Self-cert' mortgages: the end of an era?
‘Self-cert’ mortgages have been around for some time and were designed to allow mortgage applicants to make a declaration (i.e. to 'self certify') as to what their income was and this declaration would be taken at face value, with no proof of the figures stated being required by the lender. Due to the increased risk being taken by a lender, a higher rate of interest (than a full status high-street lender mortgage) was generally charged and often the loan (compared to the value of the property, ‘LTV’) was reduced to reflect the increased risk. For example, a self-employed client with a good credit history would have been able to borrow 90% of a property's value, whereas someone in the same structure who had missed mortgage payments, or who had CCJs or defaults, would be limited to, say, 60% of the property's value. Often other restraints were placed on this type of mortgage. For example, only so much could be overpaid and often redemption penalties and tie-in periods were harsh.
Ridiculous though this may seem, originally these mortgages were designed for a reason - namely to help people who have fluctuating or hard to prove incomes obtain finance. These mortgages were ideal if a client's accounts were not up to date, or if they had various sources of income from commissions, or other businesses or circumstances where it was clear that the client had sufficient income, but the nature of receiving that income didn't fit neatly into the boxes that lenders like to use.
Self-certs were not designed to allow people to obtain credit by giving false statements or by inflating their incomes, though they have no doubt been used many times for exactly this purpose. This is the problem that many people now wanting a self-cert are paying for. Rising property prices, lacking a correlating increase in earnings, and a general feel good factor about the economy persuaded the world and his wife that property was the investment to go for and that prices would do nothing but rise. Unfortunately this hasn't been the case. So in many cases, people have 'self certified' themselves for enormous mortgages based on an ideal that if problems arise then the property could be sold and the profit realised.
Unfortunately due to the credit crunch, the number of self-cert lenders has dropped from about 20 or so lenders to just a handful today. Meanwhile because of the increased risk and the general lack of desire of many lenders to lend, the borrowing levels have dropped to 75% LTV or less, even with an ‘A1’ credit score.
As there are now only a few self-cert lenders left this means that their rates are very high and most of the mortgage holders who took out such arrangements over the last 2-3 years are going to find themselves stuck with their existing lender on a rate that is considerably higher than when the mortgage was originally taken out. There are virtually no self-cert lenders available to try and re-mortgage to and given that property prices have gone down a fair margin, and/or because the client cannot prove income, the client will have no options available as they won't be able to use high-street banks unless they opt for a fast-track mortgage.
Fast-tracks are where the would-be borrower approaches a high street lender who may not ask for any proof of income, so it is said the mortgage is ‘fast-tracked’ beyond the longer list of checks and balances associated with conventional mortgages. Some fast-track lenders may accept just one year of accounts, but most will want accounts for two or three years. If you haven’t got such records, then you may struggle to get a mortgage.
Fast-tracks came about, in my view, because high-street lenders wanted to jump on the bandwagon as they were losing business to the-then insatiable demand for self-certs. Fast-tracks are available today through Abbey, Woolwich, Bank of Scotland and Halifax. A typical deal, in the current market, might stipulate that a person can borrow 75% or less of the property’s value, and if their credit rating is good, then no proof of income is likely to be required. However, the lender always reserves the right to ask for this proof.
Abbey used to be a shoo-in for fast tracking, but recently they have said that should they ask for proof of income and it is refused or not provided, then they will start scrutinising other mortgages the borrower may have applied for. With the self-cert market in the doldrums, a self-employed borrower now needs to provide between two and three years’ accounts for a full-status mortgage. Standard Life, however are less strict, and will base their application for a mortgage on six months’ accounts and six months’ projections from an accountant, but these more flexible requirements are few and far between.
Of course the good news is that due to the reduction in Bank of England base rate and LIBOR (London Interbank Offered Rate), many people will have lower reversionary rates that they will switch onto, which should help steady things in the interim period. However, the base rate is being kept artificially low at the moment and at some time it will rise, at which point there will be a whole new batch of problems and fresh tensions between borrowers and lenders.
As told to FreelanceUK by Wesley Ash, of Jade Mortgage Services
12th February 2009