Self certified mortgages, before the global financial crisis (GFC), were an option primarily used by self-employed applicants to bypass the need for lender affordability checks.
The obvious pitfall here is that there were no safeguards or lender responsibility to ensure they were not offering mortgages to individuals with no way of affording them.
Of course, the downside for those with variable income is that proving affordability is not always the easiest, especially if you do not have years of accounts or tax returns to work out an average.
While self-cert mortgages have not been around for a fair few years now, Think Plutus still receives enquiries.
We thought it was a great time to clarify the regulatory rules and unpick the best ways to secure a great mortgage product, even if your income does not fall into a conventional salaried structure.
The History Behind Self Certified Mortgages
The Financial Conduct Authority (FCA) banned self-cert mortgages over a decade ago – you can read about the rationale here and a warning about overseas lenders continuing to offer self-cert products to UK customers (more on that below!).
The concept was that, rather than providing documentation, such as payslips and bank statements to prove your income, a self-cert mortgage meant you could declare your earnings without evidence.
Interest rates were higher than standard mortgages, but this cost did not deter people desperate for financing beyond their means – with the inevitable fallout.
Why Are Self-Cert Mortgages No Longer Available?
It is clear that self-certification, while making life simpler for people who wanted quick mortgage approval without financial scrutiny, created a void of verification.
Self-cert mortgages contributed to the 2008 credit crunch and resulted in repossessions, lender difficulties and even bankruptcies.
Lenders tend to ask lots of questions and request several documents, but that’s because they have a legal and regulatory duty to be responsible and protect vulnerable customers from making poor financial decisions.
The Responsible Lending Guidelines, last updated by the FCA in December 2021, mean that FCA authorised lenders must follow ethical proof of income processes.
The Issue With International Self-Cert Mortgages
As we mentioned above, some mortgage providers, regulated or located outside of Britain, offer self-cert mortgages that would be illegal for a UK lender.
Because they fall outside of the FCA’s jurisdiction, there is not much the regulator can do, aside from issuing stark warnings about the risks.
Aside from the potential to fall behind with repayments, lose your home, and end up with severe credit issues, taking out an overseas self-cert mortgage is strongly inadvisable.
You’d not have any consumer protections automatically applied to financial products purchased from legitimate UK providers.
For example, a domestic mortgage lender has certain requirements around price transparency, publishing comparable annual interest rates, and conforming to selling practises.
In contrast, an international lender may employ mis-selling tactics designed to cost you more.
What Are the Alternatives to a Self-Cert Mortgage?
If you are self-employed or a small business owner, we appreciate that it can seem complex to demonstrate your income to qualify for competitive mortgage products – but there are many, many options available.
Think Plutus can recommend the most suitable products depending on the specifics of how much you wish to borrow, the nature of the property, and your average income, but that might include:
- Self-employed mortgages designed for independent contractors with flexible incomes.
- Business owner mortgages, from lenders familiar with calculating annual revenues including dividends, salary, bonuses and net profit.
- Regular residential mortgages offered by lenders with an affordability policy that includes regular remuneration, such as commissions, bonuses and overtime.
With support from a skilled specialist mortgage broker, it is likely more straightforward than you think to compile a few documents or financial history details to arrive at a verifiable average to support your mortgage application.
Demonstrating Variable Income for Alternatives to a Self-Certified Mortgage
Mortgage lenders each have a set of criteria, lending parameters and policies, so no two will take the same view when reviewing an application.
The perception that self-employed mortgages are hard to come by typically arises because an applicant has applied to a high-street bank, or their regular lender, without realising they have a rather rigid approach to variable incomes.
For example, some banks will only consider a salary when calculating your income.
If, say, you are a business partner or a limited company director, your salary could be a fraction of your annual earnings, with the balance made up of dividends and profit shares.
Therefore, if you apply to the first lender you come across, there is a reasonable chance they will refuse your application at a glance because the multiple of your salary is not close to enough to justify the amount you require.
However, that doesn’t mean to say this applies across the board, and lenders will consider income, such as:
- Earnings from investment rental properties.
- Income from freelance or contractor positions.
- Business dividend and salary payments.
- Net profit, from partnerships, sole traders and limited companies.
- Investment income.
- Income from pensions and trusts.
The trick is to consult an experienced broker, such as Think Plutus, before compiling your application.
We provide tailored, one-on-one advice for every client, getting to know your situation, aspirations and expectations before suggesting the most suitable lender or even the right mortgage product for you.
Once we have got a solid idea of your ideal outcomes, we get to work putting together an overview of the options, with our guidance as a private broker, supporting you to make informed financial decisions through to completion of a successful offer.
If you would like to learn more about the demise of self-cert mortgages and the mortgage options available on the current market, please get in touch to arrange a chat at your convenience.