There are numerous different types of remortgages available on the market, one of which is the Self-Certified Mortgage. But what exactly is this and why would anyone want one?
With most types of remortgages, a lender 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 building societies and depending on whether it is one person taking out the mortgage or a couple.
The building society will also want to see evidence that the income is a regular income. If you have just started a job or are in seasonal employment, then this will not serve the purposes of the lender and are potential to struggle in all cases.
But self employed people may also struggle to prove their full income. The building society will normally merely take into account the annual salary and maybe 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 instance, 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 could save lots of tax, but the annual payslips may just be showing a small fraction of the true income.
In this case, some building societies will allow the impending 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 over declaring the amount of income during the application process, but to do so could count as mortgage fraud and whilst this may not come to life quickly, someone struggling to keep up payments might find themselves in an even more tricky and unsympathetic situation if they have declared in excess of 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 merely the salaried income, when the multiplier is factored in then there is the prospective to take out a far larger mortgage than they might otherwise get based just 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 building society sees the loan as a higher risk. For this reason they will frequently charge a higher annual interest rate on the mortgage.
This means that if you might stretch to the required mortgage level with the income you might prove to your lender satisfactorily, then it may work out cheaper to not look at self-certified mortgages. Have a word with your mortgage broker about this.
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