Midweek Money: A loan for all seasons

Mortgage lenders are waking up at last: many self-employed people are highly solvent. By Rachel Fixsen
Click to follow
The Independent Culture
Being self-employed does not mean that you are destitute. But try explaining that to a high-street mortgage lender. Nearly one in five of the UK workforce now works on a self-employed or temporary basis. Patterns of working have changed, but many mainstream mortgage lenders are still as reluctant as ever to lend to those with a fluctuating income unless they have solid proof of past earnings.

"It's nearly impossible to get a mortgage unless you have three years' accounts," says Stuart Drummond, a Wiltshire farmer who applied for a mortgage 18 months after becoming self-employed. "All the high-street names, the Abbey Nationals and Halifaxes, said `No way; come back when you've got three years' accounts under your belt.'"

Banks may see you as a riskier proposition than before, but for many people self-employment marks a phase of higher income. In the IT industry, for example, working as a consultant or on a self-employed basis usually means that your career has progressed, and you are earning more than as an employee.

There are usually two options open to self-employed people looking for a mortgage. Either they opt for what is known as a status loan, which could be for up to 100 per cent of the value of the loan, and provide two to three years' audited accounts or tax statements. Or they put up a large deposit themselves, and borrow 75 per cent or less of the value.

In this case, they can take the self-certification route, which means they do not have to give proof of income. The usual credit checks are carried out, and these may include a current or previous lender's reference and a bank reference.

"Providing accounts can be a problem for many self-employed people," says Bryan Fisher, an independent financial adviser at Berkeley Financial Planning in Coventry. "When someone who has become self-employed in the last two years, the books may not look too good."

The accounts often provide an inaccurate picture of the level of mortgage that the would-be borrower can in fact afford. Many expenses can be written off against tax, effectively shrinking the business's profits and therefore the amount a lender will be prepared to grant.

"You are working with your accountant to try to make your taxable profit as small as possible, but it is that figure that will be used by the lender," says Mr Fisher.

So if you work for yourself, the easiest way to get a mortgage is to put up at least a quarter of the property price yourself. Regardless of the lenders' faith in your ability to repay the loan, they then have the reassurance that they would - unless house prices fall by more than 25 per cent - be able to recover their money by selling the house.

This also cuts out the need for a costly mortgage indemnity guarantee, or MIG, which covers the lender against any shortfall if the property is repossessed.

Choosing the right lender is a key issue. The Nationwide subsidiary UCB Homeloans, the Mortgage Business and Bank of Scotland are three lenders that specialise in self-certification mortgages. Some lend as much as 85 per cent of property value without demanding proof of income.

Stuart Drummond found Bank of Scotland easy to deal with. "They didn't even require proof of income, so long as I was not borrowing more than 80 per cent," he says.

"We would always assess an application on intention and ability to pay," says Ronnie Macaulay, director of Bank of Scotland Mortages Direct. "Not everyone has fully audited accounts next to them." For those remortgaging or moving house, a reference could be obtained from a previous lender, he says. Otherwise, credit checks are made.

Mr Macaulay says that he does not understand reluctance to lend to the self-employed. "The facts and figures are relevant only on that day. How many of our customers are still employed as they were 18 years ago?" he asks.

Your own bank should be your first port of call. "If you're using a bank for business, then you've probably got more of a relationship with them than the average customer," says Mr Fisher. The bank would not need to carry out all the credit checks, as it would already know your history.

Flexible mortgages that allow borrowers to overpay at some times and underpay at others could be particularly suitable for the self-employed. "Lenders are aware that people don't have jobs for life, so there are more flexible products on the market these days," says Pam O'Keeffe of the Building Societies Association.

For example, using a flexible loan that allows mortgage borrowers to claim back part of their over-payments would allow self-employed people to pay in the money they would normally set aside for their tax demands. This money would reduce the interest payable while it was in the mortgage account, while earning an effective tax-free rate of interest equal to the variable interest charged on the loan.

Among the flexible loans on offer are three "bank account" mortgages, from Virgin One, First Active and Kleinwort Benson, which allow borrowers to pay in all their earnings and claim back overpayments as necessary. First Active also allows the option of simply treating the account as a pure loan, so that borrowers can use any other bank they prefer, to run their financial affairs.

Using a mortgage broker or independent financial adviser will save you a lot of legwork, and usually cost you nothing. An IFA will simply take a procurement fee from the lender, as well as commission on any insurance product sold. "It is a complex area, and a bit of a minefield when trying to analyse the different costings," says Mr Fisher.

Bank of Scotland (0645 812812); UCB Homeloans (0645 401 400); The Mortgage Business (0345 253253); Berkeley Financial Planning: (0800 214074)

`The Independent' is offering a free 36-page Guide to Flexible Mortgages, with tips on all aspects of home loans, including how much you can borrow, how to repay the mortgage and a list of useful names and telephone numbers. For your copy of the guide, sponsored by First Active, call 0800 550551 or fill in the coupon on this page