Self-employed borrowers face months of wrangling with banks and building societies to secure a mortgage after the last big lender of self-certification home loans pulled out of the market.
Platform, part of the Co-operative Bank, blamed plans by the Financial Services Authority to ban the controversial deals for its decision.
Self-cert loans were designed for self-employed borrowers with an irregular salary who found it hard to prove their income. However, at the height of the housing boom, they were dubbed “liars’ loans” as fears spread that regular borrowers in full-time employment were using the deals to inflate their income and boost the amount they could borrow. In 2007, half of all deals were approved without a check on the borrower’s income.
Mortgage lenders will still accept applications for mainstream deals from the self-employed, but borrowers must jump through a number of hoops.
Here, Times Money considers the mortgage options for the self-employed.
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Financial statements
Self-employed homebuyers and those looking to remortgage can apply for mainstream mortgage deals, but the rules about proving income are more restrictive than for conventional borrowers.
Lenders typically require accounts going back a number of years. People working in partnerships or unincorporated businesses may be asked to submit evidence of profits and turnover for the past three years. This is usually available in annual financial statements produced by an accountant or in information provided on a tax return, suggests Stephen Herring, of BDO, the accountant.
Mr Herring says that, if borrowers are trading through a limited company, lenders will look at the profits left in the company and the salary and dividend taken by the applicant. “It is also important to provide the most recent annual financial accounts and to be able to produce these papers in decent time, or it could trigger alarm bells for lenders. You should be able to produce annual financial statements within six months of year end.”
Not all lenders insist on three years’ accounts. Principality Building Society requires only one year’s figures. Cheltenham & Gloucester, owned by Lloyds Banking Group, and Woolwich, the mortgage brand of Barclays, will get an underwriter to look at your case if you provide accounts for a single year.
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Future earnings
Lenders will not always insist on three years’ financial statements if borrowers are able to provide evidence of future profitability. For example, Halifax has been known to accept one year’s accounts if they are combined with evid-ence of contracts for future work.
David Hollingworth, of the broker London & Country Mortgages, says: “Lenders will often take into account long-term contracts or commissions as evidence of future earning potential when considering whether to approve an application.”
Other borrowers may be asked for projected earnings of their company. Mr Herring says: “You could support your application by submitting recent monthly or quarterly VAT receipts that show recent business activity and would be a useful guide to future earnings.”
If your business has had a bad year, it may also be useful to explain the fall in earnings to a lender and provide evid-ence of a return to growth.
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Check your accounts
Accountants may want to depress your profits or earnings to avoid tax, but this could have an adverse impact on the amount that you can borrow. If you are taking a salary from the business, it is important to show this. Some lenders may look at the salary and dividend taken from the profits of a limited company rather than other factors, such as underlying profits. Borrowers should also remember to include details of other income in applications.
Abbey, the UK’s second-biggest lender, says: “In the same way that we would count a bonus or other benefits, we would take any earnings related to the business into account. It is worth putting it all down.”
Ask your business bank
Self-employed borrowers who do not meet the criteria of lenders offering the most competitive deals should consider appealing to the bank or building society that provides their business banking.
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Mr Hollingworth says: “Borrowers should always check to see if they will qualify for the best deals in the market. However, if it transpires that they will not qualify for the best rate, the priority should be to find a deal with the most flexible lending criteria.
“The bank you use for your day-to-day business may not have the most competitive rates, but it is likely to look more favourably on your application.”
Loan-to-value
Mortgage brokers say that it is harder for self-employed borrowers to secure a deal with a high loan-to-value ratio. It is likely that lenders will also be considerably more flexible for borrowers with the largest deposits. Mr Hollingworth says: “Lenders will be more lenient if the loan is worth less than 70 per cent of a property’s value.”
Case study: New mortgage took a lot of work
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Tim Hutton, a director of an insurance brokerage in Princes Risborough, south Buckinghamshire, sold his family’s house in April and has been trying to secure a mortgage deal on a property for six months.
The 37-year-old, who is married with two daughters, owns 45 per cent of the business and previously would have applied for a self-certification loan.
“I knew that it would be hard to secure a deal,” he says.
Last week Mr Hutton received a mortgage offer from Royal Bank of Scotland, through Savills Private Finance, the broker. He is borrowing £656,000 on a two-year tracker, pegged at 2.99 points above the base rate.