Self Certification Mortgages
Understanding Self Certification Mortgages For The Self Employed
What are self certification mortgages and how do they work? Self Certification mortgages are a generic name given to schemes that do not need evidence of income. Instead they rely on the customer's declaration of how much they earn each year. There are different types of schemes to suit different circumstances.
Lenders realise that many people just do not fit standard lending criteria, much of which may have been written many years ago. Just because they do not fit does not mean the client is a bad risk or they cannot afford the mortgage they want. It means they cannot, with good reason, meet standard evidence of income requirements and need a different type of mortgage, in this case self certification mortgages.
Why is it difficult to prove income? Well, the more sophisticated and more tax efficient we become, the more difficult it is to tick boxes.
Most employed people can prove their income by showing their last three pay slips. Easy! However, what if they also have rental income from investment properties, or from a trust, share dividends or an offshore venture? It may still be difficult to prove every last penny and self certification mortgages may be the answer.
For the self-employed and company directors their definition of "income" could be completely different to that of a lender. A simple example could be a sole trader who takes drawings for the business and leaves a small net profit each year. Some lenders will base the mortgage on a multiple of the net profit only, whilst others base it on the drawings only - but few will take both into account. From the sole trader point of view his "income" is a combination of both PLUS other tax allowances, such as "use of home" expenditure. He may also contest that certain types of depreciation are a book figure only. There can be a huge difference between a lender's "net profit" figure and the customer's "Disposable income" figure.
By using self certification mortgages the "definition" of income generally rests with the client. Therefore if you genuinely feel your disposable income is £50,000 per annum - and the net profit figure of £10,000 does not tell the full story - then you are justifiably able to declare your income as £50,000.
However, whilst the onus is with the customer to declare a genuine "income" figure, Self certification mortgages ARE NOT designed to allow people to declare a false amount just so they appear to meet criteria. Such false declarations are a form of fraud and a serious criminal offence.
Having established a simple example of what is good and what is bad, what other situations are suited to self certification mortgages?
The range of situations is almost unlimited. It could be a company director who receives salary, dividends and bonuses from his company or companies. It could be someone who's accounts are not up to date and the last audited accounts do not reflect current trading. Someone >who receives foreign currency from exports may also find it difficult to agree an equivalent amount in sterling with lenders due to fluctuating exchange rates and so self certification mortgages may be more appropriate
How do you know whether self certification mortgages, or similar schemes, are right for you? Which lender is best suited to meet your needs and offer the best product and terms to meet your individual circumstances and needs?
Simply contact an independent mortgage broker who can offer advice on the whole of mortgage market. They will consider all factors, advise on the most suitable self certification mortgages and then recommend the best lender and product for you.
