Be your own boss - at a price

For those outside the wage matrix, 'self-cert' loans are an option, says Stephen Pritchard

Suggestions that the Financial Services Authority is set to investigate high-risk or specialist lending may worry a few borrowers, not least the self-employed.

Because of the perception that they are higher risk borrowers, some lenders do not accept self-employed applicants, or will steer them to subsidiaries specialising in "non-conforming" loans. This is an argument that suits some brokers, especially those who specialise in riskier, "sub prime" lending. This market is worth between £25bn and £30bn, and accounts for one in 10 of all mortgages.

What is the difference between sub-prime and self-certification?

A sub-prime mortgage lender will accept applications from borrowers with past credit problems, such as County Court Judgements and mortgage arrears. The more severe the credit problems, the higher the interest rate.

A self-certification mortgage is where the borrower is unable to prove their income with payslips. This might be because they work for themselves, have commission-based incomes, incomes from property or are contractors. Although some self-certification deals are available to borrowers with credit problems, most lenders are looking for a good credit score to offset the lack of proof of income.

Aren't there also concerns about 'self-cert' loans?

There have been reports of buyers using self-certification and "fast-track" lending schemes to take out a larger mortgage than they could otherwise justify.

Lenders have responded by tightening their checks. Previously, with fast-track mortgages, the lender might not ask for proof of income from the outset. But they reserve the right to do so further into the process.

"Self-certification loans for the self-employed are likely to come under the spotlight," says David Hollingworth, director at brokers London & Country. "But if your income comes from one main source, even if you have bonuses or commission, you have no real reason to use self-cert. But it really is a useful tool for the self-employed."

What will a self-certified mortgage cost?

Increasingly, not much more than a standard mortgage deal. In the past, borrowers would have faced paying 1 per cent or more above regular loan rates.

Cheshire Building Society has a three-year tracker rate at 4.85 per cent with a £399 arrangement fee; Bank of Scotland has a two-year rate at 4.89 per cent with a £999 fee or 4.99 per cent with a £599 fee.

But self-certified mortgages are less flexible - most will not allow overpayments. Many are not portable, either, so they cannot be tran- sferred if the borrower wants to move. These are features that are now commonplace on normal loans.

Do I even need to look at self-certification?

Not necessarily. A good broker will always check first whether a lender will accept a mortgage on standard terms. If they do not do this, ask why.

"Self-cert is not suitable for all self-employed people and a broker should first assess whether the client can get access to a mainstream product," says Melanie Bien, associate director at brokers Savills Private Finance.

"An offset or flexible mainstream deal that allows over and underpayments and payment holidays may be far better, as long as the client can meet the lender's income criteria," she says.

Lenders will want proof of income, but even this is not as complicated as it was. A handful of mortgage companies claim that they need audited accounts. But in practice, almost all will accept an Inland Revenue Self Assessment tax return.

Some banks and building societies will ask for three years' figures, but many will accept two years' or even one year and a projection. Buyers who can provide at least one year's figures should receive offers from at least a couple of lenders.

"The baseline has to be whether you need a self-certification loan at all," says Hollingworth. "A mainstream mortgage may often be available. If you are self-employed, you should not be paying a premium for the sake of it."