Victims of success

Paradoxically, a poorly paid clerk may find it easier to get a mortgage than a successful entrepreneur. But there are ways round the problem. Tim Weekes reports
If you had set up a business that was making pounds 75,000 in annual profits just 18 months after it started, it would not be unreasonable for you to consider buying a home that reflected your new earning power. And you might expect that the high street lenders would be fighting each other for the chance to provide a mortgage for such a dynamic and successful business person.

Think again. Most lenders feel secure lending to a company employee. They have to do little more than get a reference from the company, look at the employee's salary, and then multiply it to tell them how much they can lend to that person.

They tend to treat the self-employed rather differently. The Halifax is typical. A spokeswoman says that it would normally require three years' sets of audited accounts from a self-employed person. That, of course, immediately excludes the entrepreneur whose business is only 18 months old.

Failing that, the Halifax will try to make an assessment based on other evidence, especially if the applicant is an existing borrower or saver. But building societies and banks still bear the scars of their easy-going lending in the mid-Eighties. They remember the self-employed borrowers they had then, some of whom went out of business and defaulted in the recession of the late Eighties. It has made them wary of lending to people running their own businesses.

In fact, even if you have three years of accounts, your problems do not necessarily stop there. An approach to a high-street lender can be complicated by the form of those accounts.

Michael Bell, of the Kings Lynn accountants Wheeler & Co, cites an example in which, for tax purposes, a business proprietor paid himself a very small salary - but took a large amount out of the business in the form of dividends. A building society he approached refused to consider anything but the salary as long-term, continuing income, and he was refused a mortgage.

But, as Mr Bell points out: "You cannot have one set of accounts for the Revenue and another for the mortgage lender." He says that the staff at building society branches are seldom qualified to make a judgement on the financial affairs of the self-employed. "Looking at a P60 and a current payslip provided by an employee's company is far simpler for them to assess. I feel sure clients of mine have been refused a mortgage simply because the building society did not understand the accounts," he adds.

The Halifax insists that this should not be the case. It says it employs specialist backroom staff at its branches, who are trained to assess mortgage applications. But Mr Bell feels that a self-employed person should in any case consider approaching a lender through their accountant. "An application needs presenting in the right way," he says. "An accountant can explain exactly what is income and what isn't."

There is, however, another way round the problem of applying for a mortgage. Brian Skeet, an independent financial adviser at Cityview Financial Services, says that a few mortgage companies are beginning to specialise in lending to the self-employed. They are not well known to the public, however, and you will not find them on the high street. One is UCB Home Loans, a subsidiary of the Nationwide. The managing director, Mike Lazenby, says that UCB does not rely solely on accounts: "What you see on the balance sheet is not necessarily what is happening in the business. Accounts are often drawn up to appease the Inland Revenue, not to impress the bank manager," he says.

Instead, UCB offers what it calls a "bespoke" service to the self-employed. Its specialists spend time analysing a self-employed person's business, including their forecasts, their cash flows and their strengths as managers. Analysis of the accounts comes right at the end of that process. As Mr Lazenby says, a set of accounts can tell you only what the business did last year or the year before; it is no guide to the future.

There is, however, a price to pay, and that comes in the form of a mortgage interest rate 0.5-1.0 per cent higher than the standard variable rate. This means, of course, that if you think you match the criteria of the high-street lenders, you should consider using them.

In the past, the self-employed have also tended to produce accounts showing artificially high business expenses, and correspondingly lower profits.

This is because the Inland Revenue used to give taxpayers some latitude in estimating business expenses such as car mileage and a spouse's salary. Mortgage lenders who failed to examine the accounts closely would not detect that this failed to show a real picture of the business's income.

Under self-assessment that at least should be less of a problem, because the Revenue is going to demand detailed logs of regular business expenditure. Although self-assessment is in its early stages, the belief among accountants is that accounts presented to the Revenue are likely to be more realistic than in the past. Whether they are any better understood by the building societies is an entirely different matter