There\'s no pleasing some people. Just when you thought mortgage lenders were doing everything humanly possible to give borrowers maximum flexibility, along comes a survey that suggests customers want a lot more.
Research commissioned by Bank of Scotland Mortgages has revealed that borrowers, particularly the self-employed, think that more needs to be done to tailor self-cert deals to their needs. Many who chose to become self-employed and enjoy the freedom of being their own boss are disappointed to find mortgage lenders applying the shackles.
Bank of Scotland asked self-employed borrowers which products were unnecessarily restrictive and 44% named mortgages ahead of business loans, personal loans and investments. And what did they demand above all else? Flexibility, flexibility, flexibility because their fluctuating incomes make this more important than other attractions such as rates, choice and service.
So are self-cert lenders really chaining their customers to restrictive deals or have borrowers failed to appreciate what’s already available?
Ray Boulger, senior technical manager at John Charcol, declares himself sceptical about the findings, suggesting the people surveyed don’t realise what self-cert products are available.
“There is already a good selection of flexible self-cert mortgages,” he says. “You can get the same flexibility on self-cert mortgages as on mainstream deals, including unlimited overpayments, payment holidays and the ability to borrow back overpayments.”
Freedom, of course, comes at a price.
“Borrowers who want the best possible rate must realise they will have to sacrifice some flexible features because these cost slightly more,” he says.
If borrowers feel their deal is too restrictive they either didn’t request flexibility at the time of application or their broker’s advice wasn’t good enough.
“I haven’t found any problem sourcing flexible self-cert deals,” he says. “Any broker who struggles is either not familiar with every product on the market or works with a small panel of lenders and offers their clients a restricted choice of deals.”
Boulger suggests the survey may have been tailored to promote Bank of Scotland’s self-cert range. Surely not. The lender should know better than most that flexible self-cert deals are available. After all, it offers a rather good one. Personal Choice, available on self-cert up to 80% LTV, offers immediate 5% drawdown, overpayments, payment holidays, the ability to draw back overpayments and a cheque book. Boulger rates both product and lender.
“Personal Choice is a lifetime tracker charging 1% above base rate. It’s a good, flexible deal from a lender that understands the market and offers attractive underwriting,” he says.
Nick Gardner, director of Chase de Vere Mortgage Management, says Birmingham Midshires and The Mortgage Business also offer decent flexible self-cert deals.
“Borrowers who want flexibility must be prepared to take a variable rate and also pay a premium, just as they would pay a premium for flexibility in the mainstream market,” he says.
But he would like to see more flexible deals on the market.
“With the number of self-employed rising above three million, self-cert has a huge and growing part to play,” he says. “Clearly many of the self-employed have fluctuating incomes so it’s surprising there aren’t more flexible deals on offer.”
Gardner says bad publicity about self-cert loans may have deterred a lot of lenders from entering the market.
“This is a shame because self-cert meets a genuine need. There is reasonable choice among lenders that do offer loans but the self-employed deserve a broader and more competitive range.”
Melanie Bien, associate director at Savills Private Finance, would also welcome more products and innovation targeted at the self-employed, both in the self-cert market and beyond.
“Self-cert mortgages aren’t always the answer,” she says. “I would welcome more flexibility on standard mortgages too. This would allow more self-employed borrowers to pay reasonable rates of interest rather than be penalised.”
Jonathan Cornell, technical director at Hamptons Mortgages, is surprised and sceptical to hear that self-cert borrowers claim to rate flexibility so highly. Like mainstream borrowers, he finds they value one thing above all else – rate.
“Flexibility is nice but it depends on the premium you have to pay for it,” he says. “Rate is still king.”
On that subject, the good news is that growing competition in the specialist market has driven rates down.
“Borrowers who can’t prove their income only pay a small premium over a status mortgage,” he says. “Previously they would have paid much more, even if they weren’t high risk.”
Lenders are constantly evolving their self-cert criteria.
“Many used to insist the self-employed had to have been in business for at least 12 months or produce their books, even though they were going self-cert precisely because they weren’t in a position to do either,” Cornell says.
Now they can secure a self-cert deal after as little as three months. “That’s more generous than most people need as they don’t often want to hang a new mortgage around their neck before they know how their business will go,” he says.
Brokers of clients who can’t prove all their income shouldn’t automatically assume they have to go self-cert. The trend towards affordability criteria should make it easier for them to get mainstream mortgages.
“This could slash the numbers who go self-cert by allowing those with lower outgoings to borrow more than on income multiples,” Cornell adds.
For example, take a man earning 40,000 a year salary plus a further 10,000 from consultancy work, looking to borrow 175,000.
“If he was restricted to 3.5 x income he would have to go self-cert because he would need to take into account all his income,” says Cornell. “But a mainstream lender that uses affordability criteria might happily offer 5 x his basic salary and not charge him a premium.”
Cornell says self-cert mortgages have cast off the stigma of being solely for people with credit problems.
“They play an increasingly important role for people who either can’t prove their income, have just become self-employed or have a variety of sources of income.”
Frances Scanlan, chief executive at Knight Funding, warns that flexible features aren’t always a good thing as they can be a dangerous temptation to the self-employed.
“If they want the flexibility to miss payments when cash flow is tight, this won’t benefit them in the long run because the overall debt will take longer to pay off,” she says. “Any borrower who expects to skip repayments regularly because of cash flow fluctuations should consider whether they can really afford that level of borrowing.”
The self-employed can also benefit from flexible features if they use them wisely. For example, they could pay money set aside for their tax bill into their mortgage.
“This cuts their mortgage repayment and earns interest at a higher rate than if the savings were placed in a deposit account,” Scanlan says.
She argues that a good fixed rate is still more suitable for many.
“Instead of seeking a flexible mortgage they may not use to full advantage, they might be better with a good fixed rate,” he says. “That cuts initial payments and gives greater certainty about monthly commitments.”
Do lenders believe their products offer borrowers sufficient flexibility? UCB Home Loans places “heavy emphasis” on the flexibility of its range of self-cert mortgages, says head of sales and business development Gary Webster.
“Flexibility is important for borrowers in the self-cert market because such a large proportion have variable incomes,” he says. “It allows them to make overpayments during times of peak earnings or take payment holidays when income falls due to late payment from clients, seasonal changes in demand or investment in materials.”
Platform offers a self-cert product with flexible features including drawdown, overpayments, underpayments and payment holidays.
Paul Hunt, head of marketing at Platform, says: “This has proved popular since its launch three years ago and gives borrowers almost all the flexibility they need.”
But borrowers haven’t exactly been falling over themselves to exploit those flexible features.
“In reality, few people take up even one of these flexible options let alone all of them,” says Hunt.
Paul Howard, director of intermediary sales at The Mortgage Works, says flexibility has its place but the one thing that brokers demand above all else from a self-cert mortgage is certainty.
“The question we hear all the time is – ‘But is it really self-cert?’. If a broker has made a solid application for a self-cert mortgage, they don’t want the lender coming back with quibbles or making further checks into their client’s income,” he says.
There’s a simple reason for this.
“If a broker could substantiate their client’s income they wouldn’t have to go for self-cert. They don’t want to submit an application only to find the lender asking questions about income that they are in no position to answer.”
TMW reserves the right to phone the applicant’s accountant or employer to check that employment details are accurate but it doesn’t question how much they earn. Like most self-cert lenders it also reserves the right to carry out a plausibility test on the application.
“If a window cleaner claims to be earning 100,000, that will raise eyebrows and the broker will generally accept we need more information,” Howard says. “But they don’t want lenders treading all over their application with clodhopping boots. It’s against the principle of self-cert. Most lenders have the balance right.”
Howard says he is impressed by the serious way brokers now tackle the subject of regulation.
“They are aware of the need to comply with their obligations under statutory regulation, and generally only do self-cert if they are satisfied it is right and proper,” he says. “Some people will always flout the system but most brokers take regulation seriously and the reputation of the sector is recovering.”
The self-cert market has taken more than its fair share of knocks, notably the notorious BBC investigation by The Money Programme
in February 2004 and the Financial Services Authority mystery shopping exercise last November, which found “significant failings” in brokers’ affordability and suitability checks.
John Charcol’s Boulger is pleased that the market has avoided controversy since.
“The BBC may have done the industry a favour, although it didn’t feel like it at the time,” he says. “It acted as a wake-up call, giving the industry time to clean up its act before regulation and avoid even worse problems.”
Hunt says self-cert may have taken a battering but any brokers scared off by the bad publicity are doing their clients a disservice by restricting their choice unnecessarily.
“As with all financial products, self-cert mortgages must be sold responsibly and the applicant’s personal cir- cumstances and needs taken into account. This is the duty of the broker, lender and borrower.”
FSA criticism of brokers mostly centred on record-keeping.
“Brokers were failing to demonstrate why a self-cert product had been chosen and they must address this issue, possibly by reintroducing a reasons why letter within the recommendation process,” Hunt says.
Self-cert still has the clout to attract new lenders, with Alliance & Leicester launching its first product in July – a two-year tracker charging 0.45% above base rate with a maximum 85% LTV and 699 arrangement fee.
Mehrdad Yousefi, head of intermediary mortgages at A&L, says this launch shows the market has cleared its name and has great potential. The trend towards affordability-based lending should give it a further boost, as should the more responsible attitude being adopted by brokers.
“Every broker must do a fact-find to satisfy themselves that the customer can afford to service the loan,” he says. “I reckon 99.9% of brokers would not recommend a self-cert mortgage unless they were completely satisfied that the customer had sufficient income to cover the loan.”
Self-cert has survived intense scrutiny by TV journalists and City regulators, and confidence is growing. Brokers may be broadly satisfied with product flexibility but if the market is to continue its revival, it could still do with more products, competition and innovation.
Brokers are well placed to help self-employed
Ian Giles is director of marketing at Kensington Mortgages
More than 3.6 million people were self-employed in the UK in 2005 which equates to 12.7% of the total workforce, according to the latest Datamonitor report. This makes self-employment the largest factor contributing to the demand for specialist mortgages.
But Datamonitor points out that self-employment remains a barrier to credit offered by many mainstream providers, as in most cases a minimum of three years’ unbroken employment history is required before a mainstream lender will be able to adequately assess a credit application.
Research by Bank of Scotland Mortgages that shows consumers believe mortgages need to be tailored more to the needs of the self-employed appears to endorse Datamonitor’s findings. But the devil is in the detail, and in that detail brokers can find the opportunity to educate, advise and find mortgages for self-employed borrowers.
Mainstream lenders may require a minimum of three years’ unbroken employment history and because of their size, status and presence on the high street, many borrowers believe this to be the stance of the entire mortgage market. But it is not. Specialist lenders are much more flexible in the amount of information they need to see from self-employed borrowers. Indeed, one specialist lender will accept cases from self-employed borrowers from day one of their self-employment.
And whereas any borrower can walk into a branch of a high street lender, many specialist lenders only operate via intermediaries so if a self-employed person wants a mortgage they will probably have to seek the help of an adviser to arrange it.
With this in mind, mortgage brokers have a great opportunity to grow their businesses by helping self-employed clients. But it will not happen overnight. The research indicates there is still a perception among borrowers that it is hard to get a mortgage if you are self-employed. The industry – brokers included – must work to change that perception. And the message should not only be that self-employed borrowers can get a mortgage but also that there are products available to meet their individual needs.
Again, specialist lenders have worked hard on developing products that are specifically tailored for self-employed borrowers, taking into account all the issues they will face. For example, they can provide self-cert products that offer self-employed people the chance to borrow up to 90% LTV, or ones that include flexible features that allow them to regulate the effects of a fluctuating income.
And these products are not confined to mortgages. Mortgage payment protection is particularly important to self-employed borrowers, who may not have the safety net of a salary to fall back on if they find they are unable to work due to illness. Specialist providers offer policies tailored to their requirements, such as cover that will pay out backdated to the first day they cannot work.
So specialist products that have been developed to cater to the needs of the self-employed are available but if borrowers are unaware of these it means that we as an industry must work harder to educate the public. If we can do this, the results will be beneficial to brokers and borrowers alike.
Flexibility is the essence of self-certification
Chris Pearson is head of sales and marketing at BM Solutions
Self-cert mortgages have earned their place in the mortgage market. After many knocks the sector has been successfully reviewed by the Financial Services Authority and is widely respected for the products it provides to borrowers. Lenders and brokers see the opportunities in the sector and are keen to capitalise on them.
Product innovation in self-cert has grown alongside the sector and there is now plenty of choice available for brokers when placing self-cert business. The general opinion on self-cert products has always been that the most important thing for borrowers is rate. Features such as cashbacks and free legal services have been considered nice to have but not the deciding factor in product selection. Many industry figures have commented that they still believe rate is the most important factor for borrowers across most sectors and that it will always remain paramount.
But recent research suggests that in the self-cert sector product flexibility is key, with 50% of borrowers putting flexibility ahead of rates, choice and service when asked what they value in self-cert deals. From a lender’s point of view this makes interesting reading – are we to believe less choice and more flexible products would really work? And from a broker’s point of view, would a drop in service really be acceptable for the sake of a flexible product?
The answer to all such questions is a compromise. Flexibility is the essence of self-cert, which should provide a solution that meets borrowers’ varying needs. At BM Solutions we have found that the use and popularity of flexible features varies as widely and is as diverse as the circumstances our customers experience. It’s about choice – self-cert customers all have different circumstances and when it comes to products, one size does not fit all.
As working patterns evolve, borrowers in the self-cert sector expect flexibility in their mortgage as they do in any other product. For example, self-employed borrowers in the early years of trading may find that the ability to over and underpay helps in managing cash flow, and seasonal or contract workers can take advantage of payment holidays.
The ability to over and underpay and take payment holidays provides peace of mind for many borrowers. Drawdown facilities, including drawing down on overpayments, provide further tools to help in budgeting.
As a result of the demand for flexibility many lenders offer flexible self-cert deals and with brokers’ advice, clients can find products that best suit their needs.
The reality is that the UK mortgage market is well established and lenders and brokers are aware of what borrowers are demanding. That is why leading lenders already address questions of flexibility, rate, choice and service within their self-cert ranges.
Risk is being assessed more appropriately
Jon O’Brien is operations director at the Professional Mortgage Packagers Alliance
Self-cert mortgages were originally meant for the self-employed who, by the nature of their work, received irregular income payments and variable net profits.
Old fashioned approaches by lenders that looked at net profit to ascertain affordability meant the self-employed were disadvantaged. On the one hand the accountant working on behalf of the self-employed would be mitigating tax wherever possible but lenders would look at the net rather than gross earnings of the self-employed. They could afford mortgage repayments but lenders needed to recognise the way self-employed people operated and were renumerated. The self-cert mortgage was born.
It is interesting that a recent survey states that the self-employed want more flexibility to cover the irregular income aspect of their work. Many self-cert lenders operate flexible payments with their schemes, The Mortgage Business being but one example. The survey suggests that the self-employed are not aware of these type of schemes or that they do not go far enough to meet their needs. Flexible mortgages work if there is enough equity in the property to underpay, take payment holidays and run a sort of overdraft on the mortgage. If there is no equity in the property schemes such as Northern Rock’s Together mortgage which lends up to 125% of the property by the use of a mortgage and unsecured loan arrangement may be appropriate.
Lenders are balancing their self-cert products with the introduction of affordability calculations. Nationwide has had a form of affordability mortgage for more than 10 years. Other lenders have developed more sophisticated models. In certain instances GE and Freedom Lending lend up to 7 x income. Affordability calculations mean that the risk element of self-cert mortgages – meaning the ability of customers to service payments – is being assessed more appropriately as the calculation is based on an individual’s ability to pay.
Brokers probably have more difficulty placing self-cert mortgages than mainstream but if they use a good specialist distributor such as a member of PMPA, all aspects of customer need will be considered.
It would be good if all lenders that offer mortgages for the self-employed would include daily interest under and overpayments as a required feature and service to this sector. This would also help in lenders’ strategy of retaining customers in the longer term.