Ask Money: can I use my investments as collateral?

David Hollingworth of L&C Mortgages addresses a Money Observer reader’s question about taking out a mortgage.

May 7, 2019

I have £200,000 in different investment funds held with interactive investor. I am self-employed, so my income over the past 10 years has been in peaks and troughs. I would like to buy my first house. Is it possible to take out a mortgage using my investments as collateral, without having to cash them in? If not, could you recommend the best way for someone who is self-employed to get a mortgage?
Russell Cross, by email

David Hollingworth of L&C Mortgages replies: All mortgage lenders will require a deposit of some kind, and the bigger the deposit, the better the choice of deal and lender you are likely to have. However, lenders will not be able to consider investments as collateral for a standard mortgage. If you have additional funds that could be available as a deposit it could allow you to avoid liquidating some or all of the investments.

Lenders will offer standard mortgages to self-employed borrowers, but do need to be able to see a track record of income in order to confirm that the mortgage will be affordable, now and in future. Due to the potentially variable nature of self-employed income, most lenders will want to see at least two years of accounts or tax self-assessment, and in some cases three years.

As you have been self-employed for 10 years the amount of track record should hopefully not pose a problem. However, lenders will also consider income levels over the most recent two- to three-year period and in an ideal world look for a steady or increasing income over that timeframe.

That income will then be used in the lender affordability calculation along with regular, committed expenditure and outgoings to assess an affordable borrowing amount. Lenders will approach affordability in different ways and so it’s important to shop around, as just because one lender can’t help it doesn’t mean another won’t.

Exploring how much you can borrow may help give some clarity around how much you will have to budget for a deposit alongside the other costs. That may then help you to decide how much you can or want to keep in investments, or whether it will be necessary to cash some in.

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