Mortgages

What Do I Do Without The Self-Cert Mortgage Option?

It used to be that the self-employed could obtain a mortgage without having to jump through hoops to prove their income. A self-certification (self-cert) mortgage allowed them to declare their income without having to document it extensively. Borrowers were taken at their word. Unfortunately, self-cert mortgages were banned in 2011. So now what?

When the financial crisis hit back around 2008, subsequent investigations revealed that one of the biggest problems leading to the crisis was the global mortgage market. Lenders were approving mortgages to people who could not really afford them. So to prevent that from ever happening again, changes were made. One of the things the Financial Conduct Authority (FCA) did here was to ban self-cert mortgages.

If you are self-employed and believe that the self-cert mortgage was your only hope, think again. There are some alternatives to mortgage self-certification more than capable of getting you into that house you have been dreaming of.

Going to overseas lenders

The first option is one you absolutely should not even consider: going to overseas lenders. We only mention it here because there are people who push this option as the best way to go for self-employed home buyers. It is not. In fact, the FCA has specifically warned against these kinds of mortgages.

Some of the fees that overseas lenders may charge can be extortionate

Obtaining an overseas self-cert mortgage could open you up to much higher fees and interest rates. Some of those fees could be extortionate. Overseas lenders tend to be harder to contact, may be quicker to repossess if you fall into arrears, and are not covered under the Financial Ombudsman Scheme. In short, borrow only from a legitimate UK lender.

Other self-cert options in the UK

There is no way to get around the fact that obtaining a mortgage in the UK requires some sort of income documentation. But lenders are able to look at a variety of documents. They do not have to rely solely on PAYE statements from employers. If you are self-employed, you can use any of the options listed below. The more you can furnish, the better you will be able to document your income.

1. Self-assessment tax returns

Your greatest asset as a self-employed person is your self-assessment tax return, also known as form SA302. Assuming you have been honest in filing your taxes, that document certifies your income for the tax year it relates to. Furnishing several years’ worth of self-assessment tax returns shows the lender you have consistent income.

2. Dividend statements

Assuming you have investments that generate dividends, any of your dividend statements demonstrating a profit can be used to document income. Those dividends are a source of income even if you don’t liquidate them. The fact is that they remain accessible in the event you need them to pay your mortgage.

A man is shown organising paperwork at his office desk

3. Investment accounts

You might have certain investments that do not necessarily generate dividends though they still turn a profit. Any and all statements you receive on your accounts can be used in support of verifying your income. Your broker should be furnishing you with regular statements already, but you can always ask for an updated statement if you need one.

4. Profit and loss statements

Perhaps your company is set up as a limited company for which you are the director. As a director, you should be receiving a salary. Your PAYE records are proof of your income. Profit and loss statements showing your share of the profits can also be helpful.

5. Pensions and government benefits

Any sort of income you derive from a pension or government benefits counts toward your eligible income. Any record you can produce in support of this income can be applied to getting a mortgage. However, note that this can be a bit tricky. If you rely on government benefits and your government pension for a substantial portion of your income, you still might have trouble securing a mortgage.

6. Rental income

Perhaps in addition to being self-employed, you are also a landlord. That’s great news. Any rental income you derive from your properties counts toward your total income. All you have to do is produce financial statements demonstrating that your properties are generating income.

At least two years’ worth

Regardless of the methods you use to prove your income, a typical lender is going to require two years’ worth of records. You are going to have to show that all of your sources of income have been steady enough to support a mortgage moving forward.

It was difficult for self-employed people to get mortgages after the FCA banned the self-cert mortgage back in 2011.

It is true that the FCA banned the self-cert mortgage back in 2011. And yes, it was difficult for self-employed people to get mortgages in the immediate aftermath. But in the long run, it has been good for everyone. Requiring self-employed workers to better prove their income reduces the risk of taking on unaffordable mortgages.

If you had been hoping to get a self-cert mortgage, it is time to rethink your strategy. We have given enough options here to meet the needs of most self-employed people. If you are planning to buy a home in the future, start documenting your income now. That will make the mortgage application process easier down the road.

About the author

Thomas Henderson

Thomas worked as a consultant in personal finance in the UK for 18 years. He has found a passion in sharing his experience on familymoney.co.uk

Thomas also takes pleasure in woodworking, reading and observing stock market trends.

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