Take the plunge

Brokers can either take the easy way out and ignore self-cert business or they can take the plunge and participate in this profitable sector, says Gurnam Bhuller

Whether the wider industry likes it or not, the self-cert sector has become a vital part of the mortgage market and it looks set to remain that way. The debate about the justification of recommending self-cert deals will continue and rightly so, but how can you attempt to stop what market forces dictate?

An increasing number of customers are making changes to their working patterns and becoming freelance or self-employed. Some peoples’ employers are starting to support them in either working from home or working on a more flexible basis.

These trends are leading to more mortgage customers not being able to prove their incomes through the conventional route of providing payslips or accounts.

The competition for mainstream lending remains fierce and lenders are being forced to cut profit margins on their product rates in an attempt to retain market share. This explains why there has been an influx of lenders – including some historically more cautious players – entering the prime self-cert market.

Once shunned by established financial institutions this sector is now bustling with lenders keen to establish their presence, tempted by attractive profit margins.

The potent mix of demand from customers and supply from eager lenders means this sector will continue to thrive. This has created more choice for customers who require self-cert mortgages and helped to considerably narrow the margin between these and mainstream rates.

But charges relating to self-cert mortgages remain clients’ main concern. With the help of technology, most customers these days have done some research prior to meeting a broker or lender. They are often aware of the lowest interest rates in the market, and for most customers it comes as a shock to be informed that they do not meet the criteria to qualify for these rates.

Being charged a higher interest rate for a self-cert mortgage is bad enough, but for many there is also the stigma attached to being bracketed out of the prime customer category.

Some clients can’t understand how a lender can deem their application, with no proof of income but usually a large deposit, a higher risk than that of an applicant who can prove income but who may have little or no deposit. Who is the riskier borrower?

Clients often also feel that they are charged higher fees by brokers to advise them on self-cert mortgages. While often justified, this does not feel fair.

The industry has responded by reducing rates and the best self-cert rates are often on a par with, if not better than, 95% LTV mainstream rates.

The criteria for self-cert mortgages have evolved, allowing more customers to qualify. For example, the minimum deposit re-quired is constantly being reduced.

But perhaps the single most important change has been to break down the divide bet-ween mainstream and self-cert mortgages through the introduction of fast-track underwriting. While not available to people who cannot prove income, this has allowed more customers in grey areas to obtain mainstream rates.

Another improvement customers would like to see is an increase in flexible features. While some lenders deserve credit for their product terms, others still do not offer standard features such as portability or any overpayment facility as part of their mortgage conditions. Some are even charging higher lending charges on self-cert mortgages and it is not unusual for both arrangement fees and valuation fees to be higher than with standard deals.

Brokers seem to be split when it comes to the merits of advising on this type of business. They either avoid the self-cert market or consider it an essential and profitable area of their overall business.

So in a growing market that often pays higher proc fees, why are so many brokers still choosing not to deal with self-cert mortgages?

This decision may be based on the fact that they are not comfortable with the compliance demands of recommending these products.

How does a broker interpret and understand the Financial Services Authority’s requirements for justifying the suitability of self-cert mortgages?

It is not easy to answer this, but brokers should be optimistic that they are generally on the right track when recommending self-cert mortgages. The recent mystery shopping exercise carried out by the FSA found no evidence of widespread or systematic abuse, such as inflating or overstating income. It found only a small number of advisers willing to operate on this basis.

But overall the FSA concluded that the most important improvements should be in justifying why self-cert mortgages were recommended rather than mainstream products, and brokers should be able to show how they concluded that con-sumers could afford the products they recommended.

The FSA findings show brokers must look again at how they advise on self-cert mortgages and that further work must be done to attain the required standards of advice.

These improvements should boost confidence and encourage brokers to recommend more self-cert mortgages when they believe these would suit their clients’ circumstances. It would be a shame if good brokers continue to avoid this type of business as consumers will ultimately lose out.

More competition will help raise the standard of advice given and hopefully vanquish the perception that the self-cert market represents the seedy part of the mortgage industry.

Even in discussions between brokers you can hear a sharp intake of breath when they are asked if they write self-cert mortgages.

Picture the scenario whereby a new customer rings a broker requesting advice on a self-cert mortgage. The broker, far from jumping up and down because they have got a good lead, may be fearful and even think the worst, believing this to be a mystery shopper.

Paranoia rules among brokers when faced with these situations. But why?

Successful brokers in this market will have confidence in their skills and assess which products are right for their customers and when to recommend that self-cert mortgages are not suitable. The problems arise only when they are prepared to recommend a self-cert mortgage knowing that it is not suitable, or are prepared to collude with the customer to present a manufactured application.

The other issue facing brokers in the self-cert market is how to identify a self-cert customer. A full fact-find should always be carried out to ensure that a mainstream product is not viable and that a self-cert mortgage would be suitable. A broker may need to ask a series of questions relating to the client’s employment to establish whether they can prove their income or not. For the self-employed this is slightly easier as they only have to be asked if they have been trading long enough to have the required set of accounts.

For the employed it is much harder for brokers to justify recommending this type of mortgage. A valid reason for not being able to verify income must be documented.

This may be that the customer is on a temporary contract, they might have a second job that doesn’t meet qualifying criteria, or they may have substantial investment income. The advent of fast-track underwriting has helped in this regard, as some employed applicants may meet the criteria of a fast-track mainstream rate.

The challenge for brokers is to show that they have found the most suitable product for their customer based on their needs, and not just gone down the self-cert route without investigating all other options.

The distribution of self-cert mortgages may also be an inhibiting factor for brokers.

Some lenders only distribute through packagers while others offer exclusives through certain mortgage clubs. It can sometimes take a lot of research to find the most appropriate product, only then to discover that it is not available to brokers because they have not joined that particular mortgage club or packager.

Also, some appointed representatives are restricted from writing certain types of self-cert business by their networks.

Lenders must look at ways of making the process easier for brokers to place this type of business.

With more lenders entering the market, the competition for business has increased. This has been good for customers and brokers who recommend these mortgages.

The lenders offering these schemes often specialise in this area and although they may be subsidiaries of larger and better known institutions, they are not usually household names as far as customers are concerned.

Brokers often have to sell their chosen lender to customers and convince them that they will be borrowing from a reputable source. Maybe lenders could do more to boost awareness of their brands in this area as there seems a lack of appetite for promoting these products on TV, radio, through local branches or in newspapers.

But lenders have pushed the sector forward by offering more competitive and innovative products. And more are moving toward affordability models rather than income multiples to calculate the maximum lending amount available.

The flexibility of self-cert products could be further improved. How many self-cert mortgages offer offset facilities? Does any deal offer a mainstream rate switch facility during a special rate period if the client’s situation changes and they can provide proof of income? Clients are becoming more demanding and will no longer accept poor self-cert products just because they allow them to buy homes.

This sector will undoubtedly continue to grow and lenders cannot afford to lose self-cert customers. Brokers can either take the easy route and avoid writing this type of business or they can grasp the nettle and educate themselves, then participate in this profitable sector.

Gurnam Bhuller is director of Mortgage TCOW