Self Certification Mortgages

A self-certification mortgage is a special type of mortgage designed for self employed people. Normally a bank or mortgage lender will want to see pay slips from the mortgage applicant's employer. However since self employed people do not have pay slips this type of mortgage enables the applicant to apply without proof of earnings, instead submitting earnings forecasts sometimes backed up by an accountant.

Not all self employed people are limited to applying for self-certification mortgages. Some banks are happy to offer standard mortgages to self employed people with several years of accounts.

The self-certification mortgage industry has grown considerably in recent years with more and more lenders addressing the lucrative self-employed market. Consequently the market has become more competitive although self-cert mortgages are usually less attractive to the borrower than standard mortgages due to the added risk to the mortgage lender.

The main risk to the bank is that if the self-employed person's business goes under leaving them with considerable debts they may run into big problems repaying the mortgage.

Higher deposits are usually necessary for a self-cert mortgage too. Whereas standard mortgages might offer a 95% or even 100% loan to value, self certification mortgages are often offered at anywhere from 75% to 90% loan to value.

In recent years, some industry analysts have postulated that many first time buyers who are not self employed have masqueraded as self employed and exaggerated their income. The self certification process which sometimes enables people to borrow without proof of earnings has enabled them to borrow much higher amounts than if they had applied for a mortgage based on their salary.

The rapid increases in house prices around the UK in recent years has priced many people out of the market and as a way of getting onto the property ladder many people, encouraged by unscrupulous estate agents have gone down the self-certification route.

This is a highly risky strategy as borrowers who have heavily over-borrowed could potentially face near impossible repayment levels if interest rates increase significantly. Furthermore if the bottom falls out of the housing market as many analysts predict thse borrowers could be left with the highly undesirable prospect of negative equity.

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