If you’re self-employed and have tried to get a mortgage, you’ll be aware that it’s not always easy. But things are changing. Paula John of Your Mortgage magazine looks at a market that lenders are finally starting to take seriously
You may be coming up fast on the heels of Bill Gates, with a deposit the size of the Silicon Valley, but you could still have problems finding a mortgage if you are your own boss.
An estimated 3.2 million people in the UK qualify as self-employed. This figure includes freelancers and contract workers, as well as those who have set up their own business.
Traditionally, high street lenders have welcomed self-employed borrowers with less than open arms, if at all, while penalising them with higher interest rates.
But the good news is that growing numbers of self-employed workers in the UK and an increasingly competitive market mean there are more options for borrowers than ever before. So how do you find the mortgage you want?
Prove it
The first thing most lenders will ask for before agreeing to give you a self-employed mortgage is two to three years' worth of audited accounts. Not surprising when figures show most businesses that fail do so within the first two years of trading. Even freelance and contract workers are likely to be asked for proof of previous years' income, to help lenders assess whether they are in a good position to afford the monthly mortgage payments.
According to Jane Harrison at London & Country Mortgages, if you have evidence of your income over the last three years you should have no problem taking out a self-employed mortgage with most mainstream lenders, at 'standard' mortgage rates.
But even if you do have three years of audited accounts to hand there could be further obstacles in your path, preventing you getting the mortgage you want. For instance, a good accountant will minimise the tax liability on your income – sounds great, but it's a double-edged sword when it comes to taking out a mortgage. This is because it makes your business appear less profitable, which is not an attractive proposition for lenders looking for proof that you will pay back the mortgage without problems.
Self-assured
There is another option open to you. Self-certification mortgages allow you to certify your own income, by signing a document stating how much you earn. You do not need to provide audited accounts for the past two or three years – ideal for new business start-ups.
If you are already a homeowner expect to be asked to show the lender existing mortgage statements. Alternatively, first-time buyers will need rental references from their landlord.
There are a number of specialist lenders who cater especially for the self-certification market. These include Birmingham Midshires, Bristol & West, UCB Home Loans and Mortgage Express.
One of the advantages in dealing with specialist rather than mainstream lenders is that they are more likely to assess each mortgage application on its own merits rather than using standard selection criteria.
Self-interest
However, be aware that you will pay more for a self-certification mortgage than you would for a straightforward self-employed mortgage, because the potential risk to the lender is greater.
The amount of money that you can borrow, as a percentage of the value of the property – the loan-to-value (LTV) – is normally less than lenders will loan on standard mortgages.
The maximum LTV offered on most self-certification mortgages is 75 per cent, although some lenders, including Birmingham Midshires and UCB Home Loans, have a maximum LTV of 85 per cent.
Most lenders will lend up to 3.25 per cent of the stated or predicted single income on a
self-certification mortgage. They will also carry out 'affordability' calculations, comparing your income with your outgoings, to assess whether you can afford to repay the loan.
Self-aware
You don't have to be self-employed to take out a self-certification mortgage. Barrett believes self-certification mortgages are also ideal for people with a 'non-standard' income.
For those who are self-employed, Harrison strongly recommends that you do not stay in a self-certification mortgage "for too long".
Rest assured, even if you work for yourself, the number of self-employed and self-certification mortgage products are increasing steadily. Whatever you do, take time to look around. You may be self-employed and busy but it's worth being thorough when it comes to finding the best mortgage to suit your needs.