Self-certification mortgages were once a popular option for individuals in the UK who were self-employed or had complex income streams. These mortgages allowed borrowers to self-certify their income without providing extensive documentation or proof of earnings.
However, the availability of self-certification mortgages has significantly declined in recent years due to stricter regulations put in place by the Financial Conduct Authority (FCA).
In this article, we will explore the current state of self-certification mortgages in the UK and discuss the options available to self-employed individuals seeking to secure a mortgage.
What is a self-cert mortgage?
A self-cert mortgage was a type of loan designed to provide easier access to borrowing for borrowers who found it difficult to prove their income. Self-cert mortgages allowed borrowers to declare their own annual income without providing extensive proof, such as tax returns and bank statements.
This was appealing to many self-employed individuals who may not have had traditional payslips or tax documents to prove their income.
Why aren’t self-cert mortgages available anymore?
The availability of self-certification mortgages was affected by stricter regulations put in place by the Financial Conduct Authority (FCA). These regulations are to protect borrowers from taking on mortgages that they may not be able to afford, and to prevent lenders from offering risky mortgage products.
Self-certification mortgages were identified as a factor that contributed to the 2008 financial crisis.
As a result, self-certification mortgages are no longer available in the UK.
Were borrowers allowed to lie about their income?
It was never acceptable for borrowers to lie about their income on a self-cert mortgage application. However, the lack of any actual checks meant that this was possible .
They were also offered at a time when lenders were more interested in lending than requesting information to corroborate the mortgage application form.
Who would have used this type of mortgage?
The self-cert mortgage was probably mostly aimed at the self-employed.
But lenders accepted applicants regardless of their employment status. This would have been useful for employees whose total income included a lot of commission or bonuses. And company directors benefited from its simplicity, without having to provide proof of paye income, bonuses and dividends.
What are the alternatives?
The good news is, there are still options available for self-employed individuals seeking to secure a mortgage. These include specialist lenders that offer mortgages specifically tailored to the needs of those who are self-employed.
These lenders will still require additional information such as business accounts and tax returns in order to assess an applicant’s ability to afford the loan, but they often have more flexible income criteria than traditional banks or building societies.
A limited number of lender will also allow shareholding company directors to use retained profits when assessing their income.
In addition, some traditional high street lenders will accept applications from self-employed borrowers with satisfactory proof of income, such as SA302 forms or three years of certified accounts.
Why do lenders ask for proof of income?
Lenders are required by the FCA to assess an applicant’s ability to afford a loan before they can approve it. This is to prevent borrowers from taking on mortgages that they may not be able to afford, and to protect lenders from lending money irresponsibly. Even remortgages are based on your income.
In order to do this, lenders will ask for proof of income such as payslips, tax returns or business accounts in order to accurately assess an individual’s current financial situation. They use this information in combination with other factors such as credit score, spending habits and savings history in order to assess whether an individual is a responsible borrower.
What proof of income is now required for the self-employed?
Lenders will usually ask for at least three years of certified accounts in order to assess an applicant’s ability to afford the loan. Certified accounts are documents which have been signed off by a professional accountant and are often used as proof of income for self-employed individuals.
In addition, lenders may also require additional information such as bank statements, SA302 forms or tax returns in order to accurately assess an individual’s current financial situation. This information is then used to calculate an individual’s affordability and help lenders decide whether or not they should approve the mortgage application.
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How can a mortgage broker help?
Mortgage brokers can be a great help to self-employed individuals seeking to secure a mortgage. They will know which lenders are best suited for their needs, and they can shop around on behalf of the borrower in order to find the best rates and terms available.
They may also be able to negotiate with lenders on behalf of borrowers in order to get them more favourable terms or better interest rates. Furthermore, mortgage brokers are up-to-date with the latest lending criteria and regulations, so they will know exactly what information is required by lenders when assessing applications from self-employed individuals.
Overall, using a mortgage broker can save time, money and stress when it comes to securing a mortgage as a self-employed individual. It is therefore worth considering speaking to an independent broker before applying for a mortgage in order to find the right deal for your circumstances.
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Sean Horton is a co-owner of Drake Mortgages and has worked in financial services, mortgages and insurance since 1988. Previously a financial adviser and a mortgage broker, he regularly writes about mortgages, bridging loans and commercial finance.
