Self-cert mortgages cater for people who may be self-employed or employed and are unable to prove their income. Self-cert mortgages began 15 years ago and were initially confined to the self-employed or people running their own businesses. Because they could not comply with the normal requirement to supply a payslip as proof of earnings, they were allowed to self-certify. This involves giving the would-be lender a signed declaration of earnings, often with an accountant's confirmation. As such income tended to be more volatile than usual, these loans were deemed riskier. so the interest rate would be higher.

But low interest rates have made it easier to bear such a penalty, especially as house prices have continued to soar. Changing employment patterns have attracted more people to self-cert, including contract and home workers, part-timers and those with more than one job. This brought dozens of mainstream lenders into this specialist market, boosting its lending to 26bn last year.

But irregular earnings are much more slippery than those from regular employment so the fear is this boom will expose lenders to much higher risk. In the orthodox situation, an employee provides proof of earnings and agrees a mortgage of a set multiple of those earnings, usually three or four times with adjustments for spouse's pay.

But with self-cert there is an obvious incentive for would-be borrowers to exaggerate their income so they can buy that must-have house. Brokers are also encouraged to collude because commission paid on self-cert mortgages is often higher than on orthodox loans.

Datamonitor's Edward Ripley said: "There is also a growing belief that less documentation does not mean greater risk and that the most useful information is supplied electronically by the credit reference agencies and from other sources. And self-certification mortgages can be provided more efficiently since it is not necessary to expend time and effort seeking documentation which adds little to the ability to make the right lending decision."

Commentators on the self certification mortgage market have added that although `income-stretching' is not necessarily a problem when interest rates and unemployment remain low, the market could be a timebomb waiting to explode if macroeconomic conditions worsen.

 

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