UK Self-certification Mortgages 2007 (Segment Report)

The UK self-certification mortgage market has grown significantly in recent years, partly due to changes in lifestyle. But how much of this growth can be accounted for 'true' self-cert? Moreover, what are the major issues affecting this sector? How competitive is it? This report provides the answers.



Report Highlights
The self-certification mortgage market recovered in 2006 after a slight fall in new lending in 2005. Take-up of self-certification mortgages continues to be dominated by the self-employed and contract workers, implying that this niche market is at a greater risk if the UK economy takes a downturn. The self-certification mortgage market is served primarily by specialist lenders who distribute their products through intermediaries. This niche sector is becoming increasingly competitive due to internal competition from specialist lenders as well as external competition from mainstream lenders offering fast-track mortgages. The self-certification mortgage market remains a popular segment for lenders despite receiving bad publicity in the past. The market has adapted well to new regulations and products are becoming more flexible. There is an increasing need for self-certification mortgages since consumers work lives are evolving and becoming less conforming.


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Catalyst 1
Summary 1
Executive summary 2
Self-certification mortgages explained 2
There are two major types of player in the self-certification mortgage market 2
The self-certification mortgage market grew at an annual average rate of 17.8 per cent from 2002 to 2006 3
HBOS is the leading player in the self-certification mortgage market 4
A more competitive market has led to self-certification mortgage rates falling despite repeated base rate increases over the last two years 4
In the Datamonitor's View scenario, gross advances for self-certification mortgages continue to grow strongly and outperform income verified mortgages 5
An introduction to the self-certification mortgage market 10
Self-certification mortgages explained 10
With a self-certification mortgage, the lender requires little or no proof of the borrower's income 10
A self-certification mortgage is a catch-all product aimed at borrowers who cannot or choose not to verify their income 10
Self-certification mortgages fall into the category 'income non-verified' mortgage lending products 11
Are fast-track mortgages self-certification mortgages in disguise? 11
The UK self-certification mortgage market was worth £17.3 billion in 2006 12
Methodology used in sizing the UK self-certification mortgage market 12
Step one: sizing the self-certification population 12
Step two: converting to households 13
Step three: converting to households owned with an outstanding mortgage 13
Step four: calculating proportion of total population with self-certification mortgage 13
Step five: calculating self-certification mortgage gross advances 13
The self-certification mortgage market grew at an annual average rate of 17.8 per cent from 2002 to 2006 14
Year-on-year growth reveals that the self-certification mortgage market recovered in 2006 after underperforming in 2005 14
In terms of customer groups, the self-employed were the biggest contributors to the self-certification mortgage market 15
The self-employed accounted for 71.0 per cent of gross self-certified mortgage lending in 2006 16
Fixed-term contract employees accounted for 23.0 per cent of gross mortgage lending 17
The average annual growth of self-certification mortgages outpaced that of income verified mortgage lending during the period 2002 to 2006 17
Self-certification mortgages have continuously gained market share over the last five years 18
Various factors have contributed to the growth of the self-certification mortgage market 18
Strong macroeconomic conditions have created an environment that has led to the growth in the self-certification mortgage market 18
Furthermore, factors specific to the self-certification mortgage market have enhanced this market further 19
However, a few issues may impact on the future of the self-certification mortgage market 19
Borrowers are still overstating their incomes leaving them at a higher risk of defaulting 20
A new investigation into the self-certification mortgage market has been announced by the FSA to ensure intermediaries are meeting minimum standards 20
Intermediaries are worried about their exposure to fraud 20
There is a fear that as the self-certification mortgage market becomes increasingly mainstream fraud will increase 22
The self-certification mortgage market is more susceptible to a downturn in economic conditions than the mainstream mortgage market 22
High levels of consumer indebtedness may impact on the self-certification mortgage market 22
Conclusions 26
The competitive landscape of the self-certification mortgage market 27
There are two major types of player in the self-certification mortgage market 27
Specialist lenders are the leaders in the self-certification mortgage market 28
Self-certification is often associated with non-standard mortgage lending 28
22 of the 38 of lenders operating in the self-certification mortgage sector are specialist lenders 29
HBOS is the leading player in the self-certification mortgage market 30
A strong intermediary relationship is behind BM Solutions' success 31
While specialist players dominate this niche sector, mainstream players are increasingly competing in the self-certification mortgage market via fast-track lending 31
The self-certification mortgage market is becoming more competitive 32
A more competitive market has led to self-certification mortgage rates falling despite repeated base rate increases over the last two years 32
Lenders are becoming more flexible with LTV ratios 34
Specialist lenders have had to become more flexible with the LTVs they offer partly because mainstream lenders offering fast-track mortgages are encroaching on the self-certification mortgage market 34
Lenders are now offering self-certification mortgages in a variety of mortgage markets 34
Intermediaries are crucial to the development of the self-certification mortgage market 35
The majority of intermediaries advise on the self-certification mortgage market 35
Most self-certification mortgage business comes via intermediaries 36
Intermediaries typically saw their self-certification mortgage business grow or remain stable in 2006 37
Furthermore, the majority of intermediaries believe that the self-certification mortgage market will continue to grow 38
It is therefore important that lenders consider intermediaries when developing their self-certification offerings 39
Lenders should provide a good service and quality products to attract intermediaries 39
The majority of brokers try to obtain a fast-track mortgage for their client before they suggest a self-certification mortgage 41
Indeed, a large proportion of intermediary business comes from fast-track lending 42
Generally intermediaries do not consider fast-track lending to be a negative influence on the self-certification mortgage market 42
Conclusions 44
Forecasting the self-certification mortgage market 45
Datamonitor's forecasting model assesses the factors that have impacted and will impact the self-certification mortgage market 45
Macroeconomic factors and factors specific to the self-certification mortgage market are included in the forecasting model 45
Under the Datamonitor's View scenario, gross advances for self-certification mortgages continue to grow strongly and outperform income verified mortgages 46
Self-certification mortgage gross lending will grow at an annual average rate of 8.5 per cent from 2007 to 2011 to reach £27.3 billion in 2011 46
Under the Datamonitor's View scenario, the self-certification mortgage market gains share over the income-verified lending sector 46
Under the Best Case scenario, the growth of the self-certification mortgage market progresses rapidly 47
Self-certification mortgage gross lending will progress at more than three times the rate of gross lending in the income verified mortgage market 47
Under the Best Case scenario, the self-certification mortgage market will gain 3.2 percentage points in market share 48
Under the Worst Case scenario, the self-certification mortgage market will also expand but growth will be slower 49
The self-certification mortgage market will fair marginally better than the income verified mortgage market under the Worse Case scenario 49
In the Worst Case scenario, the self-certification mortgage market share remains stable at around 5.0 per cent 49
Conclusions 50
APPENDIX 51
Supplementary data 51
Definitions 54
Bank of England base rate 54
Buy-to-let 54
CAGR 55
Gross advances 55
Loan-to-value (LTV) 55
Non-standard customer 55
Remortgaging 55
Right to buy 55
Self-certification mortgage 55
Methodology 55
Further reading 56
Ask the analyst 56
Datamonitor consulting 56
Disclaimer 56

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Table 1: Market share of self-certification mortgages, 2002-2006 18
Table 2: Lenders offering self-certification mortgages, March 2007 29
Table 3: Average self-certification interest rate, March 2001 - March 2007 33
Table 4: Niche mortgage markets where self-certification is available as an option, April 2007 35
Table 5: Self-certification and income verified market shares under the Datamonitor's View scenario, 2006-2011f 47
Table 6: Self-certification and income verified market shares under the Best Case scenario, 2006-2011f 48
Table 7: Self-certification and income verified market shares under the Worst Case scenario, 2006-2011f 50
Table 8: Gross advances under the self-certification mortgage market split by self-certification and income verified lending, 2002-2006 51
Table 9: Proportion of self-certification mortgage market split by employment classification, 2002-2006 51
Table 10: Indexed gross advances of self-certification, income verified and total mortgage market, 2002-2006 52
Table 11: Factors affecting intermediaries' choice of self-certification lender, 2007 52
Table 12: Intermediaries' views on the effect of fast-track lending on the self-certification mortgage market, 2007 53
Table 13: Forecast gross advances under self-certification lending as compared to the total mortgage market, 2007f-2011f 54


Figure 1: The structure of the self-certification mortgage market, July 2005 3
Figure 2: The self-certification mortgage market was worth £17.3 billion in 2006, 2002-2006 4
Figure 3: The average interest rate on self-certification mortgages has become more attractive, March 2001 - March 2007 5
Figure 4: In the Datamonitor's View scenario, the self-certification mortgage market will continue to outperform the income verified mortgage sector, 2006-2011f 6
Figure 5: The self-certification mortgage market was worth £17.3 billion in 2006, 2002-2006 14
Figure 6: The self-certification mortgage market grew strongly in 2006 after stalling in 2005, 2003-2006 15
Figure 7: The majority of self-certification gross lending was accounted for by the self-employed, 2002-2006 15
Figure 8: The majority of self-certification mortgage customers are self-employed, 2007 16
Figure 9: The growth of the self-certification mortgage market was significantly faster than the growth of the income verified mortgage market, 2002-2006 17
Figure 10: Intermediaries still consider income fraud to still be an issue in the self-certification mortgage market, 2007 21
Figure 11: A fifth of self-certification mortgages are taken by first-time-buyers, 2007 24
Figure 12: Two-thirds of intermediaries think that recent rises in base rate will have little effect on the self-certification mortgage market, 2007 25
Figure 13: The structure of the self-certification mortgage market, April 2007 28
Figure 14: HBOS is the leading lender in the self-certification mortgage market, 2006 31
Figure 15: The average interest rate on self-certification mortgages has become more attractive, March 2001 - March 2007 33
Figure 16: The majority of intermediaries advise on mortgages on a self-certification basis, 2006 36
Figure 17: The intermediary channel generated £15.6 billion in new lending in 2006 37
Figure 18: In 2006, self-certification mortgage business for intermediaries was typically stable or saw slight growth, 2007 38
Figure 19: The majority of intermediaries foresee steady growth in the self-certification mortgage market, 2007 39
Figure 20: Providing a good quality of service and competitively priced products is the best way for lenders to attract intermediaries, 2007 40
Figure 21: A large part of intermediaries business comes from fast-track lending, 2007 42
Figure 22: On the whole intermediaries think that fast-track lending does not have a negative influence on the self-certification mortgage market, 2007 43
Figure 23: In the Datamonitor's View scenario, the self-certification mortgage market will continue to outperform the income verified mortgage sector, 2006-2011f 46
Figure 24: In the Best Case scenario, gross advances for self-certification mortgages will grow at an annual average rate of 13.2 per cent, 2006-2011f 48
Figure 25: In the Worst Case scenario, the self-certification mortgage market will fare better than the income verified mortgage market, 2006-2011f 49

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