It's one of the great life-changing decisions: stepping off the career ladder to work for yourself. But as many as 10 million people might struggle to arrange a regular high-street mortgage because they do not have the proofs of income that lenders require.
It's one of the great life-changing decisions: stepping off the career ladder to work for yourself. But as many as 10 million people might struggle to arrange a regular high-street mortgage because they do not have the proofs of income that lenders require.
According to UCB Home Loans, more Britons now have irregular incomes, or earn money from multiple sources. Although the number of self-employed people has been stable over the last few years - at 3.2m - the growth in contract workers, in particular, has added to the number of buyers who might not qualify for a standard loan.
Self-certification mortgages are one solution, allowing buyers to state their own income, rather than proving it with pay slips or accounts. But these loans are usually much more expensive than regular high-street mortgages. Typically, a self-certification borrower will pay a rate one per cent higher than "status" borrowers. Birmingham Midshires, for example, has a two-year fixed-rate mortgage for self certification at 5.79 per cent.
Cost is not the only issue. The self-certification market came in for scrutiny after a BBC investigation suggested some lenders were encouraging borrowers to overstate their incomes. These "fast track" mortgages bypassed the usual salary checks, and may have led to some homebuyers overstretching themselves.
Although a review by the Financial Services Authority found that self-certification borrowers were no more likely to struggle to meet mortgage payments than other borrowers, concerns persist that some lenders and brokers are directing borrowers towards self-certification, in order to take out larger loans.
Because self-certification is based on credit scoring and a statement of income and outgoings rather than payslips, the temptation to overstate income will always be there. The FSA cautions, however, that it is a criminal offence on a mortgage application.
The market for self-certification loans may also have become tougher since the FSA took over regulation of mortgages last autumn, not least because lenders now have to give homebuyers a clear statement of the full cost of any mortgage. Fewer property sales are also making the lenders' underwriters more cautious.
But not all buyers who think they will struggle to borrow on the high street need a self-certified mortgage. The rules for self-employed buyers are simpler than they were five years ago, with one year's accounts sufficient for many lenders, and most lenders willing to take applications from those with three years' figures.
"Lenders have become more flexible in relation to self-employed borrowers, as they realise that more of them are commercially viable," says David Hollingworth, a director at broker London & Country. But a lot of people still think that self employment means they must apply for a self-certification mortgage."
Still, some brokers and branch staff at high-street lenders still point anyone without proof of salary towards a self-certification mortgage, either because that is how they have always done business, or because it is more profitable to arrange a self-certification loan.
Borrowers are more likely to need a self-certification mortgage if they have several different types of income, Hollingworth says. This could include income from investments as well as employment. Increasingly, borrowers are also using self-certification for buy-to-let mortgages. Last year, 22 per cent of UCB Home Loans' business came from the buy-to-let sector.
Workers on contracts, rather than those operating as self-employed sole traders, are also an important market for self-certification loans. Mainstream borrowers might be reluctant to lend to someone on a fixed-term contract of, say, six months. Self-certification is a viable alternative. If, however, a homebuyer has a track record in the same line of work, perhaps including employment in the sector, it is worth approaching either a broker or a high street lender first.
Borrowers do have other alternatives to an expensive self-certified mortgage. One is to have a large deposit: more high-street lenders are willing to take on self-employed borrowers or contractors who have at least 25 per cent to put down. Conversely, lenders specialising in self-certification tend to levy additional charges for large loans. Bristol & West, for example, charges a higher lending fee for self-certification mortgages over 75 per cent.
It might also be worth approaching the borrower's own bank, or the bank they use for business, for help. "You will have a better relationship with them, and they might be willing to lend a personal mortgage at the normal rates," says Hollingworth.
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