If you're not a dead cert, be a self-cert

Special loans for those borrowers who can't prove their income are shaking off their dodgy image, writes Esther Shaw
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The Independent Online

Accusations, investigations, lies and suspicion have until very recently characterised the world of self-certification mortgages.

Accusations, investigations, lies and suspicion have until very recently characterised the world of self-certification mortgages.

"Self-cert" loans - allowing self-employed borrowers to state their income and rely on their individual credit reference for a mortgage, instead of offering payslips - came under fire recently from critics arguing they were open to exploitation. An undercover television investigation led to claims that, to boost sales and secure commissions, some lenders were encouraging borrowers to overstate their incomes and so secure larger mortgages than they would otherwise have been able to afford.

Although a subsequent review by the City regulator, the Financial Services Authority (FSA), found such practices were not widespread and that controls were generally adequate, a number of lenders and brokers tightened up their act.

"Companies must be seen to be lending responsibly," says David Hollingworth of independent mortgage broker London & Country.

Yet campaigners - notably the Liberal Democrats - remain concerned that irresponsible lenders may still be recommending borrowers make false claims when taking out mortgages, even though the repercussions are severe.

Simon Jones, director of mortgage broker Savills Private Finance, says: "If you are self-employed but know you have a strong income stream, you will need to have a frank conversation with your lender about income and affordability."

It is foolish to lie about how much you earn, he stresses: "It will catch up with you later."

In the first instance, you risk getting saddled with debts beyond your means if interest rates rise and loan repayments become unaffordable. If the housing market plummets, you could also end up in negative equity.

And crucially, it is a criminal offence to lie about your income on a mortgage application.

Today, Britain has more than three million self-employed workers, many of whom will have had trouble getting a mortgage from a conventional high-street lender. Working on short-term contracts, for example, can make it difficult to provide a lender with a history of consistent income.

The market for self-employed applicants is dominated by specialist lending arms of more familiar parent companies. Birmingham Midshires, UCB Home Loans and Mortgage Express, for example, are intermediaries of HBOS, Nationwide building society and Bradford & Bingley respectively

Typically, a self-cert loan will come at a premium - expect to pay an extra 1 per cent compared with a "normal" high-street deal.

"Self-cert lenders are providing a niche product and will command higher margins. This will be reflected in the cost," says Mr Hollingworth. But he urges people not to go down this route without trying the high street first. "Many people who are self-employed think they have no choice but to get a self-cert mortgage. This is not the case."

In particular, contract workers with a regular income stream in a single industry could go straight to their bank.

"If you have a good track record, you may be able to go for a straightforward deal at normal rates," says Mr Hollingworth. Three years' accounts is usually enough for a number of lenders. A big deposit will help too.

This avenue won't be open to everybody, of course. Self-cert mortgages can be the solution for people who have the income but not the evidence to prove it.

This was the position David and Yelda Hancock from Radlett, Herts, were in when they decided to remortgage. The couple, who have two children - Melissa and Joshua - wanted to fund home improve- ments including a playroom.

"The problem is we are both self-employed," says Yelda, a part-time teacher. "Our income varies from month to month. We do have the money but couldn't get up to the size of the loan we wanted to borrow on traditional income multiples."

The couple contacted their broker, who suggested a deal with The Mortgage Works, the specialist lending subsidiary of the Portman building society.

"By switching to a self-certified deal, we have not only freed up some extra cash, we're now making lower mortgage repayments," adds Yelda.

The Hancocks only had to declare their "disposable income" to the lender, but requirements for self-cert will vary. Some lenders will want to see bank account details and references from previous lenders, while others will simply need you to sign an application form.

"If you're self-employed, you'll usually need to prove you've been trading for 12 months," says Mr Hollingworth. "The lender will then want to carry out other checks into your financial history and credit score."

Anyone considering self-cert should shop around for the best offer. One way to do this is through a broker. "The range of self-cert mortgages includes discounts, fixed rates and flexible products," says Mr Hollingworth.

Also in the borrower's favour is that since the furore over self-cert early last year, mortgages have come under regulation by the FSA. This means lenders now have to give homebuyers a clear statement of the full cost of any mortgage - while borrowers have recourse for compensation if they think they have been victims of mis-selling.

"Now that mortgages are regulated, it is vital the figures declared on an application form are realistic," says David Bitner of mortgage adviser Bradford & Bingley. "An applicant needs to be able to justify his or her declaration, as any incorrect figures would amount to fraud."

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