Self-certification mortgages

Self-certification mortgages are loans where the lender doesn’t want to see any proof of income.

Borrowers who seek self-certification mortgages generally have income from several sources, earn variable amount of commission or are self-employed and do not have accounts to prove their income.

‘Self-certification’ means the borrower signs a declaration confirming they have income at a certain level in return for the lender agreeing not seeking proof of income.

Often, lenders will offer a mortgage at a smaller ‘loan-to-value’ than they would to a borrower who can prove their income with a reference from an employer or accountant.

‘Loan-to-value’ is the amount of mortgage the lender is prepared to advance against the market value of a property. For instance, where an employed person might be offered 90% loan-to-value against a £200,000 property, a self-certification borrower may be offered 75% - 80% loan-to-value against the same property.

So self-certification borrowers should expect to put a larger deposit down on buying a house than an employed borrower.

It’s also likely that a self-certification borrower will also have to pay a slightly higher interest rate than other borrowers because the lender considers more risk is associated with the loan.

In all other respects, a self-certification mortgage is the same as any other mortgage.

Self-certification mortgages are sometimes available through brokers to borrowers with poor credit histories. The rule of thumb is the worse the credit record; the borrower will receive a lower loan-to-value and pay a higher the interest rate. Some lenders will advance about 60% loan-to-value to people with particularly poor credit histories.

Self-certification borrowers must not inflate their income when applying for a loan. If you tell the lender that you earn more than you really do, this is a fraud offence called obtaining a pecuniary advantage.

In the past, self-certification mortgages have sparked controversy. The BBC alleged that self-certification mortgages were being abused with borrowers encouraged to lie about their income in order to get a bigger mortgage.

An inquiry by the Financial Services Authority, the industry watchdog, found that in some cases this was true but was not a widespread problem.

Many buy-to-let mortgages for landlords buying investment properties are self-certification mortgages.

Instead of basing the loan amount on the landlord’s income, the lender has a formula for working out maximum borrowing against the rent received for a property. Different lenders have different formulas but they are generally based around ‘rent cover’

‘Rent cover’ means the rent received each month should be 125% or more of the mortgage repayment at the lenders standard rate.

For example, if the mortgage payment is £400 a month, the rent received should be at least £500 per month.

Summary

• Self certification mortgages are designed for people who can’t prove their income, especially self employed
• Don’t overstate your income to obtain a self-certification mortgage.
• Self-certification borrowers generally have to put down a bigger deposit and pay a higher interest rate than employed borrowers
• Most buy-to-let mortgages are self-certification mortgages worked out on the property’s monthly rental income rather than the landlord’s income

Featured Products

	Looking for a commercial mortgage?
	Save money with a flexible mortgage