Mortgage types

Self-cert mortgages

If youíre self-employed or your income fluctuates, a self-cert loan could be the answer

Lenders tend to approve mortgage applications on the basis of long-term and regular income, usually with at least three years of payslips. If you run your own business you may be able to show three years of accounts but if you have an irregular income you may not qualify for a conventional mortgage. This is where self-certification mortgages can help.
Self-cert mortgages are for people whose income is difficult to assess using the usual methods. They allow you to declare your income without accounts to back them up. The decision on whether or not to lend to you will be based on how confident the lender is that you will be able to repay the mortgage.

The process
You may have to consider a self-cert mortgage if you: 

  • Are self-employed
  • Get a large proportion of your income from commissions or overtime
  • Work on a contractual basis
  • Work part-time or irregular hours
  • Have numerous strands of income
  • Rely on bonuses as opposed to your normal wage

In other words, if itís normal for your income to fluctuate, this could be misleading on a conventional mortgage application and may even be rejected.
With a self-cert mortgage, you make a signed declaration of your income. The amount you borrow will be based on this. The lender will then make extensive credit checks and possibly look at bank and lender references, confirmation of previous ownership from solicitors and landlordsí references.
If youíre self-employed, donít assume that you can only choose a self-cert mortgage, however. Many lenders have relaxed their lending criteria, enabling you to avoid the sizeable fees and early repayment charges that can make self-cert mortgages expensive.

Self-cert mortgages represent a slightly higher risk for lenders so interest rates are higher than for conventional mortgages. However, rates have come down in the past few years to reflect the fact that increasing numbers of people have varying incomes and more lenders are coming into the market with new and improved deals. Self-certs are normally 0.5% to 1.5% above mainstream rates.
However, you still need to make sure that you can afford the repayments, whatever happens to interest rates. Itís this aspect of affordability that the lender will be scrutinising when deciding whether or not you are a suitable applicant for a loan.

What type of mortgage?
As with conventional mortgages, self-cert mortgages can have fixed or variable rates and flexible features. These may suit you for different reasons:

  • People with newer businesses may struggle to deal with unexpected rises in mortgage rates, so a fixed mortgage can be excellent value
  • If the business is more established, a variable tracker rate might be more appropriate, as it will allow payments to fall if the base rate does. However, the borrower should have a cushion of earnings should rates rise
  • Flexible rates allow contract workers to overpay in good times and underpay at others, as well as take advantage of payment holidays

Just because you start off with a self-cert mortgage it doesnít mean youíll always have to have one. If circumstances change and you can prove a full income, itís easy to move to a mainstream product. If you are self-employed, the same might apply if you build up two or more years of accounts.
This is why itís vital to check whether you can remortgage without vast early repayment charges Ė or at least, how long it will be before you can remortgage without penalty.

Need to know

  • Self-certification mortgages can help the self-employed or people with an irregular income
  • You can declare your income without having to back it up with accounts or payslips
  • Interest rates are usually 0.5% to 1.5% higher than for conventional mortgages
  • Fixed and variable rates as well as flexible features are available
  • You may be able to remortgage to a cheaper mainstream deal when circumstances change

Information source:  Mortgage Advisor & Home Buyer publication