What is a Self Certified Mortgage?

A self-certified mortgage or ‘self-certification’ was a popular way for the self-employed to obtain a mortgage pre Credit Crunch. The process was generally reliant on an applicant being truthful in their statements in respect of personal income and it was aimed at the self-employed and people with a variable and unpredictable monthly wage packet.

Unfortunately, prior to the credit crunch, this system of self certification was abused by some and resulted in unaffordable loans being granted inappropriately. In fact, the press subsequently referred to self-certified mortgages as ‘Liar Loans’. Since the Credit Crunch lenders have been nervous about offering loans to anyone that does not fall into a standard income profile and self-certification is no longer permitted.

However, in practice the self-employed still have access to the same mortgage products as employees, as long as they can now prove their income and satisfy the new rules introduced by the Financial Conduct Authority, in “The Mortgage Market Review.” This includes a variety of tests aimed at establishing general affordability of the proposed loan.

Most lenders classify someone with an ownership of more than 20-25% of a business for which they work as self-employed whether it is a limited liability company or sole trader. If you are classified as self employed then you will need to prove your income, ideally by producing audited accounts and/or proof of declared taxable income available from HMRC on a form known as SA302. In some cases up to three years previous accounts may be needed to prove a regular income, but some lenders only require 1 year. Self Employed Contractors are treated the same as employees by some banks.

As you might expect, a regular or growing turnover and profitability and a regular monthly income will help you secure a mortgage as a self-employed applicant. The SA302 is also very useful in support of your up to date and historic accounts and a fair and reasonable payment of dividends (in the case of limited companies) is generally preferred by lenders to extreme variances. At the end of the day lenders are looking to identify and reduce their lending risk and meet the obligations put upon them by the FCA to lend responsibly.

For more information or to speak to an mortgage adviser or call 01628 507477.