Toeing the line

There is no doubting the fact that self-certification mortgages have got a bit of reputation. In October 2003, the BBC aired an episode of its Money Programme entitled Mortgage Madness, which made self-cert mortgages front-page news and they have since featured regularly in both the trade and consumer press – often for all the wrong reasons.

When they came about, self-employed people were rather a rare breed in the UK. They were not particularly well catered for in the financial world and without having a steady basic salary with pay-slips to prove it, they certainly had less choice when it to getting a mortgage. Fortunately, self-cert mortgages allowed them to state their earnings, but without the need to provide proof or accounts.

In recent years, the labour market has changed considerably. According to National Statistics, the number of self-employed people in the UK at the beginning of 2005 was 3.64 million – almost 13 per cent of the total workforce. This is compared to just over 6 per cent in the mid-80s.

The demand for mortgage deals catering for the growing number of self-employed workers has led to a substantial growth in that market. At the same time, we have seen house prices across the UK rise enormously. The latest figures from Halifax’s House Price Index show the average house price at around £179,000 – a frightening eight times the national average salary of roughly £22,500.

So with house prices becoming more and more unaffordable and a growing number of mortgage deals that do not require proof of income, there was (with hindsight of course) an unfortunate inevitability about the abuse of the self-cert facility by a minority of people.

Overstating income

The main issues concern the overstating of borrowers’ income. The now infamous Money Programme exposé revealed that some homebuyers were encouraged to exaggerate their incomes in order to get a larger mortgage loan than they would otherwise be able to based on standard income multiples.

What we have to remember is that these instances are not the fault of self-cert mortgages – this is not how they are intended to be used. A BBC article from February 2004 (following a second programme) said that the Mortgage Madness programme discovered how some people were managing to meet the soaring cost of housing. It stated that, ‘Some major British lenders had changed their lending rules in a way which allowed borrowers to get far bigger mortgages than they were entitled to. All a borrower had to do was to lie about how much they earned.’

This statement seems to imply that by offering self-cert mortgages, lenders were inviting people to lie about their earnings, which is simply not true. The products created the opportunity for some people to lie and essentially commit fraud. It’s like those honesty bars you come across in B&Bs – they’re not asking people to steal things, but unfortunately there are always some that will.

When the FSA assumed regulatory responsibility for mortgages at the end of 2004, one of its first jobs was to look into the self-cert market. It had already written to the chief executives of major mortgage lenders in February 2004, outlining the findings of a review of self-cert lending. It said that overall, lenders controls appeared to be adequate and that arrears data did not show a significantly higher rate for self-cert lending compared with full-status.

In November 2005, the FSA then published results of its mystery shopping exercise that focused on the sale of self-cert mortgages (a total of 41 mortgage firms were contacted). The overall finding was that there was ‘no evidence to suggest that brokers are regularly encouraging their clients to inflate income in order to obtain a higher mortgage sum’.

Misunderstanding or misuse?

There was however, a small number of brokers who suggested using self-cert to get a bigger mortgage. One mystery shopper’s experience summed up the problems. They said: “I was told that the only way to get the amount I needed was to self-certify.”

This attitude shows either a mis-understanding or simply a blatant mis-use of these mortgages. The need for a self-cert deal should be based purely on a borrower’s circumstances and have nothing to do with the size of loan required. Self-cert mortgages should be only considered when someone is not eligible for a full-status loan due to their inability to verify their true income – the vast majority of employees, for example, should not need to self-cert. They should not be thought of as an option for people who haven’t been able to borrow as much as they need on the high-street.

For those borrowers who feel they are not able to borrow what they need based on standard multiples, they may find that simply a bit more shopping around could solve their problem. Low interest rates and affordability models are slowly making the traditional three to four times income a thing of the past – many mortgages lenders are now offering much greater levels of borrowing.

Interestingly, Mortgages plc recently announced that since the launch of its affordability calculator, it has noticed a marked reduction in the number of self-cert applications being submitted. Surely this is an indication that these schemes have been abused. Why else would high levels of borrowing mean fewer self-cert cases?

Other changes in the overall mortgage market also mean that self-cert schemes are now not necessarily the ‘mortgage for the self-employed’. With self-employed people now making up a substantial part of the workforce, lenders are now much more geared up to lending to them on a full-status basis. Provided applicants have a track record of earnings and records to back them up (such as certified accounts or tax certificates), most lenders will not discriminate.

Similarly, lenders are now much more accommodating of contract workers than they were some years ago. Again, the main thing lenders are looking for is a provable track record of contract work, preferably contracts that have been renewed in the past.

Another scenario that often calls for a self-cert mortgage is where a borrower’s earning is heavily dependent on commission or bonuses, but again there are many lenders that consider such cases on standard terms.


One relatively recent development that seems to blur the lines between full-status mortgages and self-cert is the growth of ‘fast-tracking’. Fast-tracking allows lenders to reduce the time needed to process an application by only asking for limited supporting documents and not verifying income.

Mortgage lenders such as Halifax, Abbey and Nationwide will fast-track certain applications, subject to various criteria. The main requirement is typically a low loan-to-value (LTV) (usually 75 per cent or under), however Halifax can now fast-track up to 90 per cent LTV provided the applicant has an excellent credit record.

The important thing to remember here is that a fast-track service is purely there to save time and costs and to reduce the amount of processing required on straightforward cases – it should not be seen or sold as a self-cert scheme. Lenders still reserve the right to request proof of income on fast-track cases and borrowers should be made aware of this.

LTV limits on self-cert deals themselves have been slowly increasing recently. Lenders such as Bristol & West, GMAC-RFC, BM Solutions and Mortgage Express offer deals up to 90 per cent and Amber Home Loans has recently launched a deal available to 95 per cent.

Although there has undoubtedly been some mis-use of self-cert mortgages, it remains to be seen whether or not they will be labelled as another mis-selling scandal. While the results of the FSA’s mystery shopping exercises suggested abuse is certainly not widespread, it did find that there was a lack of documentation regarding the suitability of self-cert mortgages. 64 per cent of the 249 files that were reviewed did not adequately document why the recommended product was the most appropriate taking into account the stated needs and preferences of the customer.

The danger with this is that without detailed record-keeping, it will be very difficult for a broker to prove their advice was suitable if a complaint was made further down the line.

In its letter to mortgage lender chief executives in 2004, the FSA said that arrears data did not show a significantly higher rate for self-cert lending, compared with full-status and that this suggested that ‘borrowers have not been taking on larger mortgages than their income would justify’.

Working together

If this situation changes however, it could lead to further problems for this market and it would be interesting to see what proportion of the recent jump in repossession figures was attributed to those with self-cert mortgages. Interestingly, a recent report by Standard & Poors in Australia revealed self-cert arrears were consistently double that of arrears on standard loans.

We will unfortunately never know exactly how much abuse there has been in this market in the past, but it is vital that lenders and brokers work together to ensure these deals are used appropriately in the future and to avoid a few bad apples spoiling the whole barrel.

Tight controls, accurate record-keeping and through fact-finding of borrowers circumstances are essential. It is also important that self-cert mortgages are properly explained to borrowers in order to get rid of the mis-conception that these deals can help you borrow more. If this is done, then self-cert mortgages should continue to be useful, niche product for those who truly need them.