Flexible mortgages simply open more doors

Self-certification mortgages are the answer for the self-employed, says Guy Clapperton

Self-certification mortgages have been under the spotlight since a Financial Services Authority (FSA) investigation last winter. It was triggered by a BBC Money Programme last October in which advisers were secretly filmed encouraging reporters posing as house-buyers to get bigger loans by exaggerating their earnings.

Birmingham Midshires, the former building society now owned by HBOS, suspended four employees. Two have been disciplined and two have returned to work, Midshires said.

But lenders and brokers dismiss the episode as an isolated incident. "I think the problem has been exaggerated," says Bob Sturges, communications manager with the specialist mortgage broker iGroup. "[Self-cert] isn't responsible for pushing up house prices, and mortgage delinquency or arrears is no higher in self-certificated mortgages than in any other form of lending."

Self-certification mortgages are aimed at people who cannot prove their income in the normal way - perhaps a self-employed person or someone whose income derives from means other than standard Pay As You Earn (PAYE). They will be unable to produce payslips, for example, so the lender asks for a declaration saying the borrower is bona fide self-employed and has been for a period (usually six months to a year, in contrast to the 3-6 months required for a traditional home loan).

There are exceptions. Stuart Dyckhoff is in full-time work and his wife is a part-timer on PAYE; nevertheless their financial adviser suggested they bought using self-certification. "Because my wife works part-time we were looking at my income, and the usual multiple of four didn't make up the amount needed," he says. A self-cert mortgage from Abbey was the answer.

There is a clear danger that people may borrow more than they can repay, however, if they are allowed to declare whatever income will secure the property they want. Mr Sturges argues that iGroup's procedures for vetting applicants recognise the problem. "We look at the applicant's occupation and home region," he said. "If a window cleaner in the north-east claimed to be earning £100,000 a year, that would be queried."

The forms of diligence exercised by different lenders vary but the usual credit checks against a person's borrowing history and status will apply. iGroup rarely offers this sort of mortgage to someone on PAYE unless there are exceptional circumstances like a second income; if someone is employed they should be able to produce standard evidence of their status.

Ben Thompson, marketing director of the adviser Clear Cut Mortgages, adds that people with seasonal incomes or who have income from rented property may also need to look at self-cert in order to borrow the amount they need. Both agree that recent proclamations about the damage being done to the housing market are overstated.

Mr Thompson describes as exaggerated figures suggesting 30 per cent of mortgages in the south-east are self-certified. Estimates of how much of the market is accounted for by self-cert range as low as the FSA's 1 per cent. "It's not 1 per cent and it's not 30 per cent," says Mr Thompson. "It's more likely to be about 5 to 6 per cent."

This is too small a figure to inflate prices unduly, he believes, pointing to low interest rates combining with full employment, low inflation and the overall balance of housing supply and demand as the most likely factors pushing the prices up.

There are downsides to self-certification, however. For example, since the risk to the lender is higher when they have no payslip to prove income they will need a bigger deposit; 10 to 15 per cent is standard.

"Since there is a higher risk, there is a premium to pay on the interest rate charged, which is typically around 0.75 to 1 per cent above the norm," says Mr Thompson. In return, the borrower gets a speedier process than was possible under older systems and access to funds which, without self-cert, would simply not have been available before.

Although mortgage defaults are not high in self-certs, the low interest rate and borrower-advantageous underlying trend may not last. Mr Thompson adds that, since this form of home loan is less than a decade old, the true behaviour of the self-cert candidate in adverse conditions has yet to be tested.

'It was risky as I was out of work'

David Morgan, an IT contractor, was made redundant, aged 48, in 1997. "I didn't expect to find a permanent job easily; I gave myself three months." He found self-employment paid better than his previous job, so stuck with it.

When his daughter moved into a flat with her boyfriend and became pregnant, "it was obvious their flat wasn't suitable for a baby". Mr Morgan decided to buy one of the other flats in his block to let to his daughter.

But as a buy-to-let it was technically a commercial purchase, and Mr Morgan had yet to work as a sole trader for three years. So a financial advisor suggested the self-certification route.

Mr Morgan bought the flat with a substantial deposit. "It was quite risky since I was out of work, but we've made the payments comfortably so far."