Is “fast track” self certified?

The answer is, unsurprisingly both “yes” and “no”. Let us explain;

Self certification of income is perhaps one of the most misunderstood aspects of all where mortgages are concerned. Self certification does not mean that no income has to be stated, and neither does it mean that any income which is stated will be ignored; these were features of mortgage schemes known as “non status” mortgages, and have been unavailable for a number of years. Self certification is a process whereby the lender will assess the income an applicant stated on the application form in the normal way, but will not ask for proof of the amount. 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, and therefore will not ask for them. Self certification can be a useful tool where an applicant’s true income differs from their provable or taxable income. Here is an example:

Fred Bloggs runs a small engineering firm which has been a limited company for the past ten years or so. Fred’s accountant has told him that the most tax efficient way to receive his income is to pay himself a small salary and take the rest of what he needs as dividends. Fred 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 coffers from which dividends can be taken. As the profits of Fred’s company have been taxed already Fred’s accountant works out that Fred can receive approximately £32,000 in dividends without having any more tax to pay. However Fred only needs £24,000, and therefore his accountant transfers the balance to a Directors Loan Account in Fred’s name, creating a loan from Fred to his company. Fred can ask the company to pay him back whenever he wishes.

If Fred was to apply for a normal “full status” mortgage, it is likely that the lender would only allow him to count his basic salary, and some of his dividends as income, and this might not be enough to secure Fred the size of mortgage he wants. By applying for a self certified mortgage, Fred 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 Fred that he can increase his income by the value of some items which only reduce profits on paper, such as depreciation.

Obviously, by not seeking documentary evidence of income, the risk for the lender is higher than it would be for full status mortgages. This is often reflected in the interest rate to be charged which is often 1% higher, and the requirement for a larger deposit.

In contrast, “fast track” is where a lender offers the facility to “fast track” a mortgage application by dispensing with the need for documentary evidence of certain things such as income. This facility is generally offered when the lender feels that the credit score achieved by the applicant is sufficiently high for them to be able to dispense with the normal requirements whilst not increasing their risk. The lenders would like applicants to understand 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 lenders who offer a fast track facility 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 for which there is no prospect of being able to supply documentary evidence of earnings within a reasonable timescale.

So why the confusion?

Most of the confusion is created by the lenders themselves, and their changing criteria over the years. Whilst the lenders might “like applicants to understand 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.

Prior to the statutory regulation of mortgages in October 2004, 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! Indeed Northern Rock, issued statements 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 a self certification style product, and competition for market share was fierce.

Nowadays, and especially since the credit crunch took hold, lenders have been far more specific in what their schemes are. Those offering a fast track service are actively sampling a proportion and asking for evidence of income, and some, like the Woolwich are asking intermediaries to confirm that they have seen the evidence in all cases. It is this last point which demonstrates that a faster process is secondary to the real reason for offering fast track. After all, 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. Lenders learned some time ago that when “computer says no” or even “computer says yes”, there is statistically a far greater chance that the computer has made the right decision than the human it has replaced. However, checking paperwork is still something which has to be done by a human, 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.