A self-cert mortgage is quite literally what it says; a commercial loan where the borrower is signing a declaration to the effect that they are unable to prove their ability to make the repayments but are confident that they are able to do so.

Mainstream banks are definitely not in the business of lending money to companies or individuals who can not prove their income. Because of this, a new bread of commercial lender was born. The “non-conforming” lender is willing to advance funds based on the value of the property being offered as security and not the value of a business as a whole. In theory this means that if the borrower defaults on the loan, the lender can be assured of getting their money back through the sale of the property.

Self cert. commercial mortgages should not be confused with bad credit mortgages. Although the pricing structure and availability are very similar they are in fact two different situations. In either situation however a business borrower will most likely have approached a commercial mortgage broker to arrange the loan. This is because the mainstream lenders prefer to deal with established businesses who have a clean credit history.

It is almost impossible to draw direct comparisons between 'status' commercial mortgages and self cert. mortgages. This is because a status lender, such as a High Street bank, simply will not lend money on a self cert. basis. It is only in the last 3 or 4 years that full self cert. has become an option in the commercial mortgage marketplace.

The growth in self cert commercial mortgages in the UK has been almost unprecedented, which is good for consumer choice as there are now more lenders in the marketplace. The downside is that there are now many residential mortgage brokers entering the commercial market eager to make up some of the income they lost since residential mortgage regulation. These inexperienced brokers will mostly likely only have arrangements with a limited number of commercial lenders. Almost all of these will be non-conforming lenders (as they pay the highest commissions). For this reason it is becoming more and more important that potential borrowers are made fully aware of all their options.

What are the cost implications of a self cert. mortgage?

The most obvious example of when a self cert commercial mortgage may be recommended is when a client states that they have no accounts or that the accounts have not been signed off by a qualified accountant. Whilst it is true that most of the High Street lenders would have flatly rejected this type of application in the past, it is possible that a commercial mortgage broker can present the merits of the case is such a way as to at least get the application considered.

Consider a simple re-mortgage or purchase where the borrower wants to raise £120,000 against a commercial property valued at £200,000. This would represent a Loan-to-Value (LTV) of 60% which is well within a mainstream bank's lending range. Most self-cert. commercial mortgages will carry arrangement fees of between 1.5% and 2% of the amount borrowed, whereas a bank will rarely charge more than 1.25%. Leaving aside the obvious interest rate benefits of using a commercial mortgage from a bank, the other main consideration is the high level of exit fees or 'Early Repayment Charges' (ERCs). The very best you could hope for from a self-cert commercial mortgage would be 3% in the first 3 years, followed by 1% of the outstanding balance Be warned that some lenders are even charging 6% and putting in place an interest guarantee.

Obviously if the only choice is between a self-cert. mortgage or no mortgage, then most borrowers will happily pay the higher fees. Borrowers should be careful to make absolutely certain that if they are considering a self-cert. commercial mortgage they have at least tried to approach a mainstream lender first.