About four years ago, it was very hard for me to get a mortgage to buy my first home. If I believed everything I had heard, I was the perfect person for a mortgage because I was young, a first-time buyer, and made about GBP30,000 a year. Easy!
No, it's not that easy. I was young and liked to have fun, so I hadn't saved any money. I had nothing to put down as a deposit. But what are these 100% mortgages that I've been hearing about? Surely I was good enough? Oh, there was one more thing: I was self-employed and didn't have any accounts.
Self-employed and don't have a bank account or savings.
Could I borrow money? Almost nothing could be done. I couldn't get a mortgage from any High Street lender. Even my bank, which has worked with me for ten years, said no, even though they knew exactly how much I made each year and how much I spent each week. They also knew that I would have no trouble making the monthly payments on a repayment mortgage.
Then I learned about Self Certification Mortgages.
What is a self-certified mortgage? It's kind of like a mortgage, but you decide whether or not you can pay back the loan. Then I realised that the whole process of getting a mortgage depends on an institution (like your bank) deciding whether or not you can make the monthly payments.
And what is the way to figure this out? Well, if you have a job, it's your salary. A bank will give you a loan for, say, three or four times your annual salary. Most of the time, they will ask for a small deposit, like 5 percent, to show that you are serious.
If you work for yourself, especially if you don't keep records, you probably don't have an annual salary and can't show that you make money every month. Many self-employed people, including myself, live from paycheck to paycheck because their clients are slow to pay their bills. So how can you know if you can pay back a mortgage? I found that the answer was self-certification, which means YOU. You decide if you are borrowing too much money and if you can afford the monthly payments. After all, if you're smart enough to run your own business, handle your own taxes, buy things and send out bills, then you should be smart enough to figure out if you can pay your mortgage.
Think about it: Salary-based mortgages are based on what a person has earned in the past, but a person could lose their job just hours after getting a mortgage. On the other hand, Self Certification puts the onus on you to guess what you will earn in the future. You could go out of business, but so could someone who gets paid a salary.
So I thought, "Well, this is good, but I bet that a Self Certification Mortgage is something loan sharks would offer, with high interest rates, high monthly payments, and penalties like those in Guantanamo."
But I also learned something else about mortgages. Even though the High Street is full of lenders, only a small number of them are "real" lenders. The rest are intermediaries who work on their behalf. This is because there are so many mortgage applications that intermediaries have to judge each applicant and figure out how risky they are.
So, I found out that a High Street lender wouldn't give me a loan, but a smaller lender might. But here's the kicker: the mortgage I got in the end from the small lender was exactly the same as the mortgage the High Street lender had turned me down for. The mortgage itself was the same, but the way I was judged on my ability to pay it back was different.
So what's the catch with self-certification? From what I've seen, there's always a catch, and in this case, it was a very big one. For a regular mortgage, the borrower has to put down, say, 5 percent, but for my Self Certification Mortgage, the borrower had to put down 15 percent. Fifteen percent!! Yes, I can see why they ask for this and why, if you aren't being judged by the usual standards, they want to see that you're really committed. But I had no money saved up. I was young and worked for myself, for God's sake.
What did I do then? Okay, I wouldn't tell everyone to do this, but I really wanted my own home and I knew I could pay back the loan. I got a personal loan right before I applied for a mortgage. Paired with a timely bill payment, I was able to pay the deposit and cover the main costs of fixing up the house (roof, re-wiring, plumbing etc).
On the High Street, you would call this a "Home Improvement Loan," and you would get it AFTER you got a mortgage and bought the house. I just took out a Personal Loan for a little bit more money before I got a mortgage. I was lucky in that I could afford to make these payments for the foreseeable future, and I bought on a rising market. The value of my house was already more than the mortgage and personal loan combined before I even finished fixing it up (ie. 4 months after buying the property). I wouldn't tell everyone to do this, and you need to be very clear about how much you are borrowing and how much you will have to pay back in total.
But getting on the property ladder and buying my own home was the most important thing to me. This shows that if you look beyond the High Street, you can find the same or similar financial products with less hassle. The High Street always made me feel bad about myself and like a financial loser.
You might be interested to know that I recently went to a well-known, independent financial advisor on the High Street because I was still looking for a catch in my Self Certification Mortgage. I asked if I should switch to a better mortgage. He told me that the mortgage deal I had was a good one and that I should keep it for the time being. So I have.
Richard
