Money: A mortgage struggle for the self-employed

DESPITE rate increases, in many ways the mortgage market appears as competitive as ever, with lenders offering a range of discounts and low-cost fixed rates. The best deals, though, are likely to elude one group of borrowers - the self-employed.

Few lenders say openly that they prefer borrowers with a known wage from a stable job, but the attitude, especially of building societies, varies widely. It can be hard, if not impossible, for people who work for themselves to meet the lending criteria for the best offers.

Lenders claim they are more aware of self-employment but, if anything, interest rate rises are making mortgage companies more cautious. "Rather than it becoming easier, it is a case of some of the choices expanding," suggests Ray Boulger, mortgage consultant with John Charcol, a firm of brokers. Specialist lenders have more deals on offer, but the mainstream institutions are doing little to relax their rules.

The first hurdle a self-employed person faces is proving his or her income. The lenders' standard rule is normally three years' audited accounts, or two years' accounts and a projection for the next year's earnings. This contrasts with employees, who can normally raise a mortgage against just six months' pay slips. Accountants will charge for preparing the papers, but this could easily cost many hundreds of pounds.

Sometimes, lenders insist on taking an average of three years' income. For new businesses, or people whose earnings are on an upward curve, this can seriously reduce the amount they can borrow. Again, employees will normally be able to borrow three or three-and-a-half times their current salaries.

Nor might building societies appreciate the nuances of self-employed applicants' accounts. "With building societies, it depends on the information you provide," says Mr Boulger. "Unless you can provide three years' accounts, or two with a projection, they will be unwilling to lend. Even then, you still might not get much sense from a building society, because the accounts may have been prepared in a particular way for tax reasons: that is, the taxable income may have been kept as low as possible through, for example, making pension contributions."

There are lenders who take a more open view. The Halifax, for example, sees "self-employment as an expanding sector of the economy", according to Mick Gill, its manager of mortgage market practice. "From our point of view, we are trying to make sure we approach that market realistically," he says.

The Halifax is briefing its branches on how to interpret an applicant's accounts and how to distinguish between people who work for themselves and people, such as teachers or computer programmers, who work on a series of short-term contracts. The overriding factor should be whether the applicant can meet the mortgage bill, rather than a rigid set of rules, Mr Gill suggests. "We are trying to focus on the affordability of the payments," he says.

The Halifax says it will look favourably on borrowers who can show that their incomes are rising, and it does not insist on audited accounts. "We are flexible about accounts, but if you don't have certified accounts, we will ask for more information to justify the level of borrowing," Mr Gill says. The Halifax also has a central lending department and branch staff should pass more difficult cases on to head office.

Another large lender, Nationwide, bought UCB Homeloans, a specialist lender, two years ago to bolster its lending to the self-employed. UCB specialises in a market that Graeme Hughes, its managing director, admits Nationwide "is not very pro-active in". UCB's loans are often "self-certified" mortgages: loans for people who do not have the proof, such as accounts, to borrow in the normal way. The

lender protects itself by charging higher interest rates and a higher deposit. A borrower needs to put down at least 20 per cent of the price of a property. Typically a self-certified loan will have an interest rate 1 percentage point or more higher than an ordinary mortgage.

Lenders are now offering more variety for self-certified loans: organisations such as UCB now offer fixed and discounted rates. While not as competitive as the building societies' rates, they go some way to closing the gap. Even specialist lenders have their own criteria for granting mortgages and carry out thorough credit checks. For borrowers with poor credit ratings - perhaps because they have had financial problems in the past - a "non- status" loan is another option. Lenders such as the Kensington Mortgage Company offer these loans, but the price is high: Kensington lends at 3.5 per cent above Libor (close to, but not exactly the same as, base interest rates). With base rates high, a mortgage of just over 11 per cent - Kensington's rate - hurts.

There are other ways to secure a loan, such as a guarantee from a wealthy parent or relative, or the Royal Bank of Scotland's shared equity mortgage where borrowers agree to pay the bank a percentage of any increase in the value of their home.

A mortgage broker can help to find good deals. Mr Boulger says a broker will know which lenders will be flexible about their criteria and may be able to secure a loan for a client who would be rejected by the high street branch. But this service is not free: John Charcol charges up to 1 per cent of the mortgage's value for its help. This sort of charge is typical. Cheap mortgages for the self-employed look like they are some way off.