Self Certification Mortgages

by Mark Johnston

Self certification mortgages are for clients who can not legitimately verify their income. This can be because they are self employed; they may rely on high levels of commission or bonuses or on a second job.

Usually during a mortgage application the borrower provides the lender with all their financial information so they can assess the risk level and decide whether to lend or not.

A self certification mortgage means that the earnings declared on the mortgage application forms are accepted with out proof, although some lenders may ask for an accountant’s certificate or an employer’s reference and the lender may also supplement this information with credit searches.

These products do have limits however; most lenders will only allow a borrower to prove income this way if they want to borrow less than 85%.

David Hollingworth, of mortgage brokers London and Country, warns “this should not be looked at as a licence to borrow as much as you want; they are designed for borrowers who can not give evidence of their income because it is not from a conventional source”.

Due to the credit crunch these types of mortgages are offered very rarely now as few lenders are willing to take such risks. The self certification mortgage was a significant contributor to the sub prime lending crisis and many believe that it therefore can not have a future in the new era.

Under new rules by the Financial Service Authority (FSA) deals for self certification mortgages are to entirely disappear. The regulator says it wants to ensure that lenders only lend to those who can afford it and that means having knowledge of a borrowers financial situation.

These types of loans accounted for 43% of all mortgages in the first half of 2010. The Financial Service Authority (FSA) wants to prevent people falling in to debt through their eagerness to buy a property. The regulator said it wanted “to ensure lenders got back to the basics of responsible lending”.

Paul Broadhead, head of mortgage policy at the Building Societies Association (BSA) said “the whole purpose of the regulators change is to put responsibility at the heart of lending again”.

The ending of these mortgages will impact mostly upon the 13% of the workforce who are self employed.

Many experts agree with this ban as long as there is an alternative solution for the self employed. They stated “provisions must be made for the ever growing numbers of self employed who have been forced in to this situation through redundancy and the lack of permanent work available”.

Some lenders and the Financial Service Authority (FSA) have however recognized that many people these days have flexible lifestyles and financial arrangements and have took this fact in to consideration.

Therefore the regulator has stated that lenders will be allowed to ‘bend’ their rules for existing borrowers on self certification mortgages. This is however provided that they have been up to date on repayments for at least 12 months.

In this case they will be allowed to re-mortgage or transfer their loan to a new property even if their income does not fit the new rules. Although they will not be able to make any additional borrowing.

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