One of the most common misconceptions in the UK mortgage market surrounds the differences between self certification mortgages (also known as self cert), and fast track mortgages.
A self certification, or self certified mortgage is one where the applicant does not have to prove how much they earn. However, self certification does not mean that no income has to be stated on the application form, and neither does it mean that any income which is stated will be ignored. There used to be mortgages where this was the case, called “non status” mortgages, but they have been largely unavailable since the statutory regulation of the mortgage market in October 2004.
With a self cert application the lender will assess the income an applicant has stated on the application form in the normal way, and will apply their standard criteria in terms of income multiples and affordability, but no proof will be asked for. The lender knows that the reason the applicant is applying on a self certified basis is because they don’t have documents to prove what they earn. Self certification can be a useful tool where an applicant’s true income differs from their provable or taxable income. Here is an example:
Bill Smith runs a small workshop which has been a limited company since Bill established it many years ago. Bill’s accountant has told him that the most tax efficient way to receive his income is to pay himself a small wage and take the rest of what he needs as dividends. Bill calculates that he needs £30,000 a year to live on and so pays himself a salary of £6,000 and takes dividends of £24,000. The company makes around £60,000 profit each year on which it pays corporation tax of £12,000 (20%) leaving £48,000 in the bank from which dividends can be taken. As the profits of Bill’s company have been taxed already, Bill’s accountant works out that Bill can receive approximately £32,000 in dividends without having any more tax to pay. However, Bill only needs £24,000 to go with his £6000 wage, and therefore his accountant transfers the balance to a Directors Loan Account in Bill’s name, creating a loan from Bill to his company. Bill can ask the company to pay him back whenever he wishes.
If Bill was to apply for a normal mortgage, most lenders would only allow him to count his basic wage, and perhaps 50% of his dividends. Together this amounts to £21,000, and if the lender will lend up to four times income, this will result in a maximum mortgage of £84,000. By applying for a self certified mortgage, Bill can quite properly say his earnings are £38,000 as that is the total of his income, even though he may not have drawn it all. Indeed, in some cases the accountant might advise Bill that he can increase his income by the value of some items which only reduce profits on paper, such as depreciation. The result is that Bill would qualify for a mortgage of £152,000 if he applied on a self certified basis.
Obviously, by not seeking documentary evidence of income, the risk for the lender is that some applicants may lie about their income to get a bigger mortgage. Whilst this is mortgage fraud, many cases do not come to light until the mortgage payer starts getting in arrears, and by then it is likely to have involved significant expense for the lender. This extra risk is often reflected in an increased interest rate and the requirement for a larger deposit.
In contrast to this, a fast track mortgage is where the lender decides not to bother checking some documents, in theory to speed up the application process. A fast track option is generally offered when the lender feels that the credit score achieved is sufficiently good enough for them to be able to dispense with checking income whilst not increasing their risk. Lenders want people to believe that the facility is offered solely to streamline and speed up the process, and not to provide an application facility for those who cannot prove their income. As a result most will randomly sample a percentage of such applications, and will ask for proof of income to be provided. Fast track mortgages should not be applied for by those who can’t prove income in one way or another.
The differences between fast track and self certified are quite defined, and there should therefore be no confusion. However, most of the confusion which does exist has been created by the lenders themselves, and their frequently changing criteria over the years. Whilst the lenders might “want people to believe that the facility is offered solely to streamline and speed up the process”, a shortening of processing times is seen by many as simply a by-product, and not the real reason at all.
Before the FSA came to regulate mortgages, the terms self certified and fast track were almost interchangeable. Certainly, the likes of the Abbey and Halifax would advertise a “fast track” policy, but when their representatives came calling they would discuss their new “self certification” facility! In fact some lenders, including Northern Rock, issued statements vehemently denying that they offered self certification, whilst all the time listing fast track cases as self certified on their internal systems! The simple truth was that most lenders wanted the extra market share which came with offering self certified mortgages, and competition for market share was fierce.
Nowadays, and especially since the current financial crisis took hold, lenders have been far more specific in what their schemes are. Those offering a fast track service are actively sampling up to 10% of applications and asking for evidence of income, and some, like the Woolwich and First Active are asking intermediaries to confirm that they have seen the evidence in all cases. It is this last point which confirms that a faster process is a by-product to the real reason for not checking accounts or pay slips. Let’s face it, if evidence has to be produced for the broker, it might as well be sent to the lender anyway; the work has been done and the time spent. Except, there is no one at the lender to look at it!
Fast track is offered nowadays because it saves costs, and all other benefits are secondary. Since well before Catherine Tate made the phrase famous, “computer says no” or even “computer says yes” has been a common occurrence to mortgage lenders. Research by the lenders shows there is statistically a far greater chance that the computer has made the right decision than the human it has since replaced. However, whilst a computer can assess information entered in an electronic application, and cross reference this with data held by credit reference agencies to arrive at a logical lending decision, it can’t check paperwork. Paper documents that might not necessarily be in pristine condition have to be checked by a human being, and therefore, if the number of pieces of paper can be reduced, so can the number of humans needed to check them.
The lenders would probably say that the savings they make allow them to offer cheaper and better products and keep fees down. In the current economic climate, I doubt there are many who would agree.