Self-certification mortgages have always appeared to reside on the fringes of the mortgage market. But perception is a funny thing and self-cert is certainly not the niche product some might think. That said, it is a sector that has often be viewed with a certain level of distrust.
Part of this comes from a lack of understanding about self-cert mortgages and a lack of comfort with debt that persists among the older generation that led the way into home ownership. The older generation simply is less comfortable with debt and the idea of self-certifying their income somehow just seems dodgy. Those under the age of 40 tend to be much more comfortable with higher levels of debt and the notion of self-certifying their income. But instances in which the Financial Services Authority has criticised mortgage brokers working within the self-cert market have not helped its image, nor has the odd expos矢y the likes of the BBC.
The Council of Mortgage Lenders also holds no data on the number of self-cert mortgages sold over the years, meaning there is no clearly independent way of examining how well, or for that matter how badly, the self-cert market is fairing when compared to other sectors of the industry.
But lenders see self-cert as a big part of the mortgage market so much so that Alliance & Leicester, traditionally a very cautious lender in terms of its entry to new markets, saw fit to take its first steps into self-cert last summer.
Sally Lauder, press manager at A&L, says its entry into the market shows self-cert has matured, given the lenders commitment to responsible lending and its approach to entering new markets.
She says the move was partly a response to numerous requests from intermediaries and shows there is a healthy appetite for self-cert products among both consumers and mortgage brokers.
However, Ray Boulger, senior technical manager at John Charcol, says there is a perception that if someone is self-employed they have to take out a self-cert mortgage. Often, he argues, this is simply not the case rather there are other contributing factors.
Some self-employed people will be able to produce accounts that will be able to support the kinds of mortgage they want from a mainstream lender, but many cant because their accountant will have found a way to reduce their profits to improve their tax position, he says.
This may mean the way in which their accounts are presented puts them in a position in which they will not be able to provide enough supporting evidence to a mainstream lender, meaning they will require a self-cert mortgage.
Boulger says there are also certain types of self-employed people, such as those that work in a consultancy capacity on three or six-month contracts, that will be considered as technically fully employed by a mainstream lender if they have worked as a consultant for more than a year, despite the fact they are self-employed.
But Julian Wells, marketing manager for Mortgages PLC, says self-cert can and should be offered to borrowers that are fully employed under the right circumstances.
He says: Younger people tend to be more willing to look at different ways of working than in the past and the number of people looking at setting up in business on their own is increasing all the time.
Twenty years ago they wouldnt have got a mortgage but it is now much easier. But you can get self-cert mortgages for employed people as well as self-employed people, which is useful for some people that have a full-time job but also have a secondary income that fluctuates, and so is difficult to prove.
But Wells admits lending based on affordability has meant a reduction in the number of people opting for self-cert mortgages.
If you think back to when we just had income multiples as a way of determining how big a mortgage someone should be given, a person earning 30,000 could only get a mortgage for about 100,000.
But under affordability calculations they can now get a mortgage for about 170,000, and when you think a person earning 30,000 takes home 1,800 a month and a mortgage of 170,000 could be around 1,100 a month, or less on an interest-only basis, it is clearly affordable. So the instances where people feel the need to inflate their income and use self-cert for that reason are fewer, he says.
But John Mawdsley, managing director at the Mortgage Partnership, says there has also been a change in attitude towards self-cert products generally. These days if someone finds themselves very short on time then getting a self-cert is a very quick way of getting a mortgage, he says. Self-cert deals have got so close to prime deals that it is often worth it for the slightly higher cost. People are not lying about their incomes any more it is just they want the mortgage quickly.
It is also clearly still important particularly in light of the FSAs mystery shopping exercise in 2005 that mortgage intermediaries ensure their clients need a self-cert mortgage. Boulger warns that mortgage brokers must ensure they dont recommend a self-cert product simply because it is easier particularly since a self-cert product will be more expensive.
Wells says networks also appear to have some concerns about fully employed people applying for self-cert mortgages. He says networks generally wont let their appointed representatives recommend a self-cert mortgage to someone who is fully employed because they think someone in full-time employment should be able to get a full status mortgage.
Full status remains cheaper than self-cert and it will always be a better rate but someone might want a fast deal for a number of different reasons and might need the mortgage done very quickly, which wont happen with a full status mortgage, he adds.
Added to this is the emergence of fast track mortgages, which Boulger claims have caught out some self-cert lenders. Their response, he says, has been to increase loan to values above 75%, lower their rates and widen their criteria.
Boulger believes the use of fast track mortgages will increase to the detriment of self-cert mortgages. He says the number of self-cert mortgage sales has probably fallen over the last two or three years because of the increase in fast track mortgages and automated underwriting.
He says: There is no doubt we still need self-cert products but the numbers will get less. There will always be a market for self-cert but it will probably shrink as fast track and automated underwriting increases.
Wells disagrees, however. I would have said fast track is self-cert, he says. I have always heard the term associated with self-cert. It has never been associated with anything else such as full status or stood on its own. Electronic trading is making the mortgage process faster in general, but thats across the board it doesnt just apply to fast track.
Mawdsley takes a different view altogether. He says fast track is neither going to lead to the demise of self-cert nor can it be described as a self-cert product.
Fast track is one of those areas where if you can establish the credibility of the borrower then why not fast track them? I am not sure that it is self-cert, as fast track does not require references. It simply requires wage slips and P60s, and often it doesnt even require those the lender will simply take income on face value.
Fast track also tends to only be available at a much lower loan to value. Whereas if you are self-employed going to a prime lender with accounts that might be two years out of date, it is unlikely the lender will grant you a mortgage or it will mean a lot of work to persuade the lender to do so. So that is obviously a perfect self-cert case, he says.
Where distribution all fits into this seems a little obscure. Boulger believes distributors, while being a big force in the sub-prime self-cert market,will never be the same force in prime self-cert. But where they can have some involvement, he says, is in product design and testing.
Distributors are a good place for lenders to carry out quite a bit of product testing before coming to the market, because what they dont want to do is come to the market and then find out they have got it wrong. Also if there are issues in terms of the IT then it takes a long time to come back from that, he says.
This is borne out to some extent by Kensington Mortgages recent pilot with All Types of Mortgages, which saw the lender test a product that was 80% full status and 20% self-cert. The lender has now withdrawn the product because, says Alex Hammond PR manager for Kensington, it might have been little too complicated.
Wells agrees self-cert is a big part of distributor business at the non-conforming end of the market, arguing many distributors might not see the value of being involved in prime self-cert since the fees tend to be quite low.
But Mawdsley says this is simply not true. We are involved in the prime end of the self-cert market and always have been. Where distributors add value is there is now so much competition for self-cert business that we help to clear the fog for the intermediary, and it is the same for other sectors such as buy-to-let.
There is so much product choice and it is now so complex that mortgage brokers need to be able to see as many self-cert deals as possible in one place.
Wells says self-cert is such a big part of the mortgage market that it is likely more lenders will become involved in the sector, rather than less. No-one is expecting the self-cert market to disappear most lenders have got it in their business plans and have no intention of getting rid of it. It probably accounts for 50% of business volumes for the specialist lenders.
Mawdsley is more bullish. Products may become more complex and the boundaries between different product types could become blurred, so there will be a merging of product types to suit the changing needs of consumers.
How much of that will involve self-cert is difficult to say, but if people continue to decide to work for themselves or the number of people working on temporary contracts increases if the employment market continues to change as it has done there will always be a need for self-cert products.