What Precisely Is A Self Cert Mortgage And Who Is It Intended For?
With most types of remortgages, a bank will want to see hard evidence of proof of an income, from which they will use a multiplier to calculate how much they are willing to lend. This multiplier changes slightly between lenders and depending on whether it is one person taking out the mortgage or a couple.
The bank will also want to see evidence that the income is a regular income. If you have only started a job or are in seasonal employment, then this will not serve the purposes of the bank and are potential to struggle in all cases.
But self employed people might also struggle to prove their full income. The lender will normally merely take into account the annual salary and probably some of the remaining incomes. As a self employed trader or the director of a Ltd company, payslips might not exist or may not represent the full true income.
For example, a director of their own company might merely take a small wage for tax purposes and then the remainder of their drawings as a dividend. This might save ample of tax, but the annual payslips might just be showing a small fraction of the true income.
In this case, some lenders will allow the budding borrower to declare the amount they are earning annually rather than having to prove the actual value.
Obviously, this process is depending on trust and honesty. Without the evidence of the actual amount of income, it is up to the borrower to be truthful and declare an honest figure, maybe worked out in association with an accountant. There is the possibility of more than declaring the amount of income during the application process, but to do so might count as mortgage fraud and whilst this might not come to life quickly, someone struggling to keep up payments can find themselves in an even more tricky and unsympathetic situation if they have declared more than they were entitled to.
The advantages of self certification to the person taking out the mortgage is that by being able to include the full level of income, rather than just the salaried income, when the multiplier is factored in then there is the likely to take out a far larger mortgage than they can otherwise get based merely on their annual salary.
But, there are downsides to a self-certified mortgage. Because there is no proof of income and the borrower is working for themselves, then the lender sees the loan as a higher risk. For this reason they will usually charge a higher annual interest rate on the mortgage.
This means that if you could stretch to the required mortgage level with the income you might prove to your bank satisfactorily, then it may work out cheaper to not look at self-certified remortgages. Have a word with your mortgage broker round this.
Written by Keith Lunt, of Compare Mortgage Rates. For more useful reading, call into our finance blog.
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