The Fundamentals of Self Cert Mortgages
If you are self employed and searching for a mortgage it is likely that many obstacles will block your way, and you are not alone.
Many lenders will shy away from those individuals they perceive as too great a risk to afford credit and one common ground for this is that they are self employed.
The working populous of the UK is changing, 3 million people are now self-employed and this figure is increasing year on year. In addition to this there are also those individuals who are employed on temporary contracts or as freelancers, all of whom are also likely to find themselves denied access to a mortgage.
That is a lot of people, who, just like you, have made a calculated judgement and then come up against lenders who act with 'nanny state' trepidation to those who do not conform to their model borrower template. As the shift towards self employment continues to grow it is ultimately the lenders that could not fulfil the needs of this demographic who will lose out.
Of course there is a rationale behind why a mortgage lender may be cautious. The main reason being a self employed person's income is more likely to fluctuate from one month to the next and with this variability comes a greater likelihood the borrower will default or get into arrears.
It is also far more difficult to demonstrate earnings; self employed people will often derive their revenue from a number of different sources. There is no P60 to assist in establishing the correct income and clever record keeping may have tweaked their accounts and helped the individual to avoid tax but conversely won't help him or her to obtain a mortgage.
In response to this need there is now a more pragmatic means for those in this situation to secure a mortgage - through self certification.
A self certified mortgage addresses the needs of the self employed and freelance, enabling them to draw the funds they require without having to prove their income. The onus is placed back upon the borrower who makes a declaration as to their earnings and no further checks are made. No documentation is required to prove their circumstances, their word is considered sufficient.
Self certified mortgages enable borrowers to draw up to £1million with them putting down a deposit of at least 10-15% of the property value; this varies from one mortgage provider to another. In response to the greater level of risk posed to the lender they do carry a higher interest rate than other mortgage products.
The basis of calculation is simple, before applying for a self certification mortgage you should calculate your total household income, including a partner's wage where relevant.
From this figure you should then establish how much you can afford to pay at each monthly instalment. This should be approached with great care as a figure set too high will overstretch your finances and result in the risk of defaulting and an instalment figure set too low will result in the repayment of the mortgage taking far longer than it needs to.
As with any other mortgage product self certification mortgages come in various packages combining features such as overpayment and underpayment facilities and payment holidays. Fixed rate, variable rate and capped rate products are all available.
The processes used by lenders vary and some may seek to obtain credibility statements for the potential borrower, it is usual for banks and accountants to be contacted and if there is any doubt in the lenders' minds they will request proofs be obtained.
As with any mortgage it is always advisable that you seek professional advice before making your decision. When presented with the paperwork be thorough in your checks before signing, check the clauses and always be aware of any early settlement charges that may prevent you from moving to another product that is more suitable for your requirements in the future.
A self certification mortgage transfers much of the decision making away from the lender and over to you, the borrower, as an individual. It is vital you have thoroughly considered your position, your contingencies and are not placing your wealth and your health at risk with a mortgage product or a borrowed sum that is inappropriate for your circumstances.
If you are seeking advice on a mortgage suitable for your personal circumstances complete our no obligation contact form.
Vikki Woodward - 16th February, 2007
Use of this article or exerts thereof without the prior permission of the author is unlawful and will result in prosecution, if you wish to use the article please contact info@selfcertmortgageuk.co.uk.
