Better deals for the self-employed

If you work for yourself, you don't have to put up with second-rate packages

he desire for a better work life balance - as well as the unpleasant prospect of commuting over the summer - means that spring sees an upsurge in the number of people considering working for themselves.

he desire for a better work life balance - as well as the unpleasant prospect of commuting over the summer - means that spring sees an upsurge in the number of people considering working for themselves.

In the mortgage market, however, self-employment is often associated with more expensive home loans. Historically, lenders have tended to group the self-employed together with the "sub-prime" market, primarily borrowers who have a poor credit record.

According to mortgage experts, that is an outdated approach. The last two decades have seen steady growth in the number of small businesses and of self-employed professionals and contract workers. Now, banks and building societies have built up more experience dealing with buyers who work for themselves, and are more willing to lend to the self-employed on standard terms.

But some lenders, mortgage brokers and even the Financial Services Authority (FSA) still view the self-employed as part of the sub-prime market. Brokers may well point self-employed buyers towards sub-prime loans that are considerably more expensive than mainstream deals.

"There is still a lot of confusion about self-employment, including with the FSA, who sometimes appear to feel that the self-employed have to accept sub-prime rates," says Ray Boulger, senior technical manager at the mortgage brokers Charcol.

Some of the specialist mortgage brokers who actively target self-employed applicants are, in reality, sub-prime specialists. In some cases, these brokers will represent a small panel of mortgage lenders, rather than sourcing deals from the whole market. A sub-prime broker may not even have any mainstream lenders on their books, so all they will be able to offer is the more expensive, sub-prime loans. These mortgages will often be inflexible too, tying the home buyer to a dearer rate for up to three years.

Self-employed borrowers who find themselves steered towards a sub-prime mortgage should seek a second opinion from another broker or lender, Boulger says. A homebuyer working for themselves should qualify for a standard loan, as long as they can prove their income and have no problems with their credit. If proof of income is more difficult - perhaps because the buyer's accountant has organised finances in a way that maximises tax breaks - borrowers still have the option of using self-certified or "fast-track" mortgages. Regular self-certification loans typically attract interest rates 0.5 to 0.75 per cent above standard mortgages. A fast-track loan will usually be offered on standard rates.

Lenders offer fast-track mortgages based on a buyer's credit history and ability to pay, rather than proof of income. A large deposit will increase the options: homebuyers will need to put down at least 15 per cent, and preferably 25 per cent, in order to obtain the best deals.

James Cotton, mortgage specialist at brokers London & Country, says that lenders such as Alliance & Leicester, Abbey and Standard Life are among the more flexible. Alliance & Leicester will ask for just one year's accounts, where the buyer has a deposit of at least 25 per cent.

Contract workers should also be in a better position than a few years ago. A contractor who has worked continuously for one company, or has a track record in a particular industry, should be able to borrow on normal terms. Lenders are also more open to giving standard mortgages to contractors in fields where it is a common working practice, such as IT. Contractors might find that they can borrow a little less than they expected, however: most lenders will assume that a contractor works for 46, not 52, weeks a year. According to London and Country's Cotton, the self-employed and contractors are also benefiting from more flexible mortgages, such as offset loans that pool savings and borrowing.

"Mortgage lenders have updated their criteria alongside the new deals they offer," he says. "After all, it would be foolish to develop new products that are ideally suited to self-employed borrowers without adapting their criteria to accept them as customers."