Once upon a time self-employed workers found it nearly impossible to get a mortgage unless they had an enormous deposit and a large income from their business activities that spanned many years. Those times may be about to return as lenders are pulling their self-certification mortgage products from the market as if they are tailed beef.
Many years ago lenders had strict criteria regarding who they would lend money to and the circumstances under which home loans would be approved. Life was simpler then as the great majority of the work had steady employment, a salary or wage, and monthly payslips.
However, as time went by the work slowly evolved into a mix of employed and self-employed workers, business owners, investors, and freelancers. Although a large portion of the workforce remained employed, a significant proportion of those workers began to receive bonuses and commissions instead of a salary. This created uncertainty regarding their monthly imports. Additionally, many other workers became self-employed and others became proprietors of small businesses which provided their daily bread.
Finding a standard employee with a steady, provable and predictable salary was no longer easy. This meant that traditional mortgage products were no longer applicable to a large portion of the work so lenders were forced to invent a new type of home loan to ensure they could keep on lending.
Enter the self-certification mortgage. A product originally designed for self-employed workers who did not receive a pay slip from their boss each month. Instead these workers contracted out their services to business that would pay them by the hour, or they ran their own small businesses and billed their clients when their work was done. Many self-employed individuals who worked in this manner had high levels of income so it seemed ludicrous that they should be excluded from the mortgage market.
Self-certification mortgage products were before launched onto the mortgage market with the best intentions – to satisfy the needs of self-employed individuals who lenders believed could service the loans. Unfortunately, due to lax lending rules, self-certs were also approved to people with low incomes who simply lied on their application forms about how much they earned. In addition to this, many lenders reduced their required deposit levels, meaning that people with little or no savings could also apply for a self-certification mortgage.
Because of this, great sums of money were loaned to people who should not have been approved for a mortgage. Mortgage brokers and borrowers alike took advantage of the lethal combination of low deposit requirements and not having to prove earnings to the lenders. Self-certification mortgage products are now being vigorously blamed for much of the damage that has occurred via the global credit crunch. As a result lenders have rolled hundred of self-cert products from the market and are refusing to lend to anyone on a first-time-buyer basis.
For existing home owners looking to remortgage, lenders have reverted to the stricter criteria that were attached to self-certification mortgages in the first place. These include low loan-to-value ratios and proof that applicants are really self-employed. Perhaps the lenders had it right in the beginning.