Was there ever a case for Self-Cert mortgages?
Last Updated: 07-09-2021
Reading Time: 4 minutes
The Self-Cert had no place for freelancers and contractors who qualified for contractor mortgages. Yet for tradespeople who didn’t qualify, self certification of earnings served its purpose.
Zero qualification often occurred when self-employed entities kept insufficient trading accounts. Or, like many freelancers, they worked on ad hoc projects and had no regular income.
So what's to do now that the self-cert mortgage, or "liar loans" as they became known, are no longer available?
Contractor or Freelancer? It's important to differentiate
What do generic High Street lenders class as a freelance contractor? Do they even differentiate between the roles of freelancers and contractors?
For mortgage purposes, lenders categorise both types of tradespeople in a similar way.
The titles themselves are ambiguous to anyone outside the self-employed industry. Many contractors call themselves freelancers, and vice versa.
So, are we all sheep, destined to categorise anyone not 'employed' as self-employed? We'd certainly hope not.
That said, brokers can't use roles as a differentiator. What we use to calculate affordability instead is the payment mechanism applicants use to process income.
What do we need to qualify for a contractor mortgage?
A contractor, for example, has a signed 3-, 6-, or 12-month contract, which details their daily or hourly rate. In this respect, there's minimal difference between them and permanent employees.
To meet the criteria that qualifies for a contractor mortgage, self-employed contractors must:
- provide evidence of a contract stating hourly/daily rate, along with a CV;
- provide a minimum of three months' bank statements that confirm their contract earnings;
- need to be 'in contract' at time of application, of which 4-6 weeks at least remains before it's due for renewal.
In contrast, a freelancer would be somebody working on shorter-term contracts. By that we mean weekly, monthly or per assignment/project/booking, etc.
For example, a photographer's income is often based on variable or non-regular earnings. In these difficult financial times, their income is even more erratic. Lenders take these uncertainties into account when calculating risk.
It follows, then, that circumstances remain whereby killing self-cert has left no viable alternative.
Too much abuse of self-certification mortgages
In hindsight, it's easy to see why the FCA (or FSA, as was) wanted to act. By their nature, self-certification and fast-track mortgages were open to abuse.
Rather than kill them off, tighter controls on lending could have been the answer. Allowing flexibility for both the individuals and lenders, within guidelines, may have been preferable.
The FSA decided otherwise.
For many people with existing self-cert mortgages, the FSA's rulings will cause financial hardship. How? By stopping them from moving to other lenders to secure better deals.
Contractor Specialist mortgage brokers
There are a select few “contractor specialist mortgage brokers”, like us, who've made bespoke arrangements with lenders. Our terms allow brokers to secure mortgages based on a multiple of your contract rate.
Such arrangements have little to do with governmental reforms, either. Lenders have the discretion to modify the criteria they decide qualifies as relevant earnings for lending purposes. So long as lenders retain that choice, the "contract based mortgage underwriting" we've negotiated will remain intact.
If you have a contract in place, then you're in a healthy position. For those who'd hoped to self-certify earnings to secure their mortgage, you'll be better off finding a good accountant, instead.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.
Posted by John Yerou
on May 16th, 2013 13:12pm in