A self-certification mortgage is a method a declaring income that will be suited to an applicant who may have sources of income which are not easy to prove. Many people believe that a self-cert is a type of home loan but it is important to note that self-certification is not a type of product, rather it is a method of declaring income.
There are a number of different situations in which a mortgage applicant may not be able to provide full and verifiable proof of their income. This includes applicants who are self-employed, company directors, freelance workers, or workers who receive their income on an irregular basis through commissions and bonuses.
In many cases the actual income of the applicant may have been minimized for taxation purposes. Self-employed workers, for example, may utilize various tax minimization techniques in order to save on income tax and company tax. When it comes time to apply for a mortgage their actual earnings may be understated, leading to a situation in which they are able to borrow a smaller amount than they can actually afford.
In addition to this, many self-employed workers do not keep accurate or complete records of income earned and therefore may not be able to supply several years of trading accounts to lenders upon application for a mortgage. This can make it difficult to secure a full-status mortgage from a high-street lender.
A self-certification mortgage is designed to help people in situations such as these. The mortgage application is based on affordability and the ability of the applicant to repay the loan, but does not require proof of income. Instead of providing trading accounts, payslips or any other proof of income, the applicant must certify that they have sufficient income to service the repayments when they self-certify their income.
At any one time, there are a variety of home loan products available from various lenders with which applicants can self-certify their incomes. The products are usually available in a form in which income is not self-certified but instead is fully declared and proven. The self-cert option is sometimes made available to self-employed applicants on the same products so they are not excluded from the market.
Often lenders will require self-cert applicants to pay higher interest rates than their standard applicants for the same products. This is because of the perceived higher level of risk for applicants who are not asked to prove their incomes. For the same reason a larger deposit is also often required and depending on the loan to value ratio applied for a higher lending charge may also be levied.
Because terms and conditions vary so much between products it is always a good idea to speak to a mortgage broker to receive up to date information and advice. The terms and conditions attached to home loans are also subject to frequent changes. An astute broker will keep abreast of the market and will therefore be an invaluable source of information for mortgages which allow self-certification of income. A qualified broker will also help with the application process, usually for a small fee.