Why self-certification mortgages no longer exist

We sometimes still receive the occasional enquiry about self-certified mortgages and whether or not we can source them. If you are one of these customers, you will have been told that this sort of mortgage no longer exists.

In fact, self-certified mortgages were banned some time ago by the Financial Services Authority (now the Financial Conduct Authority, or FCA).

Self-certified mortgages became particularly popular after the financial crisis, when the uncertainty of employment led many to become self-employed. The number of self-employed people has risen by nearly 370,000 since that time. Self-certification mortgages were popular because they did not require proof of income, meaning self-employed workers were able to borrow large sums without having to provide business accounts or evidence of earnings.

Use of self certified mortgages peaked in 2010

However, whilst only 13% of workers in the UK were self-employed, over half of mortgages granted between 2008 and 2010 – and 43% of mortgages in the first three months of 2010 – were self-certification mortgages.

Self certified mortgages became known as ‘Liar loans’ 

As early as the beginning of last decade research was being carried out into self-certified mortgages. The BBC’s ‘The Money Programme’ revealed in 2004 that self-certified mortgages were being used to lie about personal income in order to obtain larger mortgages.

Mortgages have traditionally been granted on multiples of income – for instance, with a typical multiple of 3.5, a couple earning £50,000 between them could obtain a loan of up to £175,000. As house prices began to climb, more and more people found themselves unable to buy the houses they wanted, and so turned to ‘liar loans’; taking out personal loans and declaring them as income or even simply lying about their actual income in order to obtain the cheapest self-certification mortgages possible.

Self-certified mortgages may have increased house prices and contributed to the financial crisis

Alarmingly, it appeared that lenders were actually allowing borrowers to defraud them. The practice gave people on lower incomes far more purchasing power, and some argue that it contributed further to the house price boom. Because customers had also taken out more than they could afford to pay, self-certification mortgages are also cited as one of the causes of the financial crisis.

Though lending criteria became far stricter after 2008, it was not until 2011 that the FSA introduced new rules making proof of income mandatory in a regulated residential mortgage application. This effectively banned self-certification mortgages, and they have not been available since.

Getting a buy-to-let mortgage if you’re self-employed

Even though most buy-to-let mortgages are not regulated by the FCA, and were not regulated by its predecessor, the FSA, self-certification buy-to-let mortgages effectively do not exist. Most lenders who require a minimum income will require you to evidence it. Some will ask for the full three years' accounts and references, whilst others are more flexible.

The majority of buy-to-let applications, however, are assessed more on the strength of the rental potential of the property than the borrower's income; the latter is simply a 'safety net' in the event that the investment runs into difficulty.

If you are self-employed and would like to see what your buy to let mortgage options are, contact our advisors for an assessment of your situation.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.