It is funny to think of some of the products we consider as niche in today’s mortgage market. When self-certification mortgages came to prominence in the 1980s, there is no doubt they were a niche product. However, despite the sector now being worth somewhere in the region of 30bn in gross lending last year, we still see fit to use the word ‘niche’. Given the nature of self-cert, the description is accurate – but given the volumes involved, perhaps ‘specialist’ would be more apt.
From uncertain beginnings 20 years ago, self-cert mortgages have become firmly established in the UK mortgage landscape. The sector has weathered a number of storms but now seems well placed to take advantage of an increasing demand for the type of borrowing it provides.
At times in its history, self-cert has been lauded as the ‘bad boy’ in the market and been treated with a certain amount of caution by lenders, intermediaries and distributors alike. This is ridiculous, and for firms now shying away from the market because of regulatory concerns, the decision says more about their own systems and processes than it does about the perceived dangers which might lie within the self-cert market.
This was amply demonstrated when the Financial Services Authority delivered the findings of its last round of mystery shopping in the sector. The regulator found very little evidence of incomes being inflated or the product being promoted inappropriately, but did highlight the need for advisers to be meticulous in their fact finding and record keeping.
However, the words of warning from the regulator are nonetheless important, and distributors must be sure that not only are their processes well designed, but more importantly that they are put into practice.
One of the biggest confusions in the self-cert market exists in relation to fast track mortgages. Fast track and self-certification products are completely different, and ensuring they are kept apart is one of the major services distributors can deliver.
With a fast track mortgage, there is no printed criteria governing which applications will be put through the system without recourse to further checks. It comes down to the individual credit score that each application receives and it is not something advisers can determine when they submit the application.
Indeed, a number of applications will be pulled out at random by the lender in an attempt to ensure the safe running of the operation and to get a feel for the kind of cases that are being put through.
This means it is possible for a lender to require documentation to support the claims made in any one particular fast track application, which will simply not be possible if clients do not have it. In this instance, the application will be turned down, a new lender will have to be found and a further electronic footprint will be made on the borrower’s credit file.
Indeed by making an inappropriate application ” Self-cert has proved itself over the years as both an effective and innovative product and it is up to distributors to give it the reach it deserves”some lenders will begin to ask why the borrower was put on to a fast track lender in the first place and suspicions will possibly be raised even though the client has nothing to hide.
By contrast, a self-cert product carries definite criteria, allowing brokers to ensure their client’s application will be dealt with as expected if they can tick all the boxes. This dissolves the risk to the client, ensures their first application is successful and minimises the time and effort involved in securing a mortgage.
It is important that distributors make sure they are serving their clients’ best interests by being firm on the distinction between the two products. This task has not been made easy by some of the sourcing systems, which continue to list a number of fast track products as self-cert products when they are not.
Sourcing technology is now sophisticated enough to allow firms to apply their own filters and set their own preferences. To this end, it is incumbent on distributors to ensure fast track products are not brought up as self-cert deals when making a search and so avoid inappropriate products being put forward to clients.
For networks acting as principals, this is certainly something they should be looking at so they protect their members, their borrowers and themselves, while distributors acting for directly appointed firms should be offering advice in this area as an example of the added value they bring.
On top of this, networks from both the appointed representative and direct disciplines should be looking to offer the kind of training, advice and support firms need to ensure advisers adequately record their advice to clients to avoid any future problems.
There is no doubting the appetite for self-cert mortgages, and this looks set to grow. The product is not, as many believe, just a short-term fix for individuals who do not have certified salaries or accounts for the immediate past. It offers a long-term solution for those earning ongoing commission or bonuses or who derive their income from numerous sources.
As we continue to move into a commercial climate where working relationships are more flexible, it will be important for the mortgage market to offer the kind of options that clients need.
As self-cert has developed it has grown more competitive and flexible, and caters not only for prime cases but also for non-conforming situations. This will further help the market grow, and as more lenders begin to offer self-cert products, competitive pressures will see the end-borrower continuing to benefit.
However, given the specialist nature of self-cert and the increasing choice being offered, it is important the product remains in the hands of intermediaries.
This will drive a number of benefits. Like any specialist market, it is easy for confidence to be knocked or a stir to be caused at the first sign of impropriety. This was seen very clearly a number of years ago when the BBC carried out its investigation into the market and a public storm was whipped up over night.
The BBC’s findings were not insignificant but they certainly did not merit the attention they were given. That said, the episode stands as a lesson to ensure best advice is at the heart of everything mortgage providers and distributors do, and that the safeguards to client detriment they have in place are robust.
The worry for lenders in offering the product direct is that clients may not understand self-cert as well as they should. By using the intermediary channel, lenders can help safeguard against inappropriate clients taking on the product.
Advisers are also well placed to ensure borrowers do not abuse the product. Having worked hard to stamp out poor practice, it would be a real mistake for the market to be driven backwards by a small number of people trying to exploit the system.
Self-cert has proved itself on countless occasions over the years as both an effective and innovative product and it is up to distributors to give it the reach it deserves.
Whether the mortgage market still refers to self-cert as a niche product in a further 20 years’ time is a matter for conjecture. That it will become a major part of lending portfolios and evolve into a mainstay of the MDmarket is not, however, up for debate.
Martin Reynolds is director of corporate accounts at edeus