When the credit bubble burst a few years back and the ensuing crisis engulfed the whole economy, nobody knew who to blame. From bankers who mismanaged risk to borrowers who took on more than they should, it seemed everyone had played their part.
This blame culture meant certain types of borrowers were unfairly punished. Lenders left first-time buyers out in the cold, buy-to-let criteria were tightened to the point of strangulation and specialist lenders almost shut up shop as nothing but safe, run-of-the-mill lending was deemed appropriate. One form of specialist lending was particularly vilified – self-certified mortgages, known as self-cert, were seen as a major contributor to the mortgage crisis.
Self-cert mortgages were primarily designed to help those people who could produce a deposit and believed they could afford a mortgage but who couldn’t prove their income in the traditional way because they were self-employed. Producing a payslip was not an option. They, therefore, self-certified their mortgage by making a statement of income, informing the lender of what they could afford.
As lenders became more risk-averse, lending to someone who could not prove they had the ability to make repayments was no longer deemed feasible. Providers were also put off self-cert mortgages as they were so open to mortgage fraud. Without having to produce any proof, fraudsters could embellish an income and come away with huge amounts of finance.
Lenders – and indeed regulators – decided this kind of lending was just too risky and in 2010, self-cert mortgages were banned.
In July 2007, when there were 3,803 residential mortgages, 860 (or 23 per cent) were available through self-certification. Now there are none but, of course, there are still plenty of self-employed people wanting to buy properties.
Indeed, according to the Chartered Institute of Personnel and Development, by the end of 2011 the number of self-employed people in the UK had risen to record levels of 4.14 million.
So if you are self-employed how do you get a mortgage? In theory, self-employed people, who can prove their income for the past three years, can apply for the same mortgages as anyone else. In practice, you will have to work harder to be accepted and you may not be able to borrow as much as someone who can produce payslips.
There are a number of steps you can take to give yourself the best chance of getting a mortgage.
Understand your finances
Having proof of your income may not be enough. Sometimes you will need to be able to explain it too.
For employed borrowers, lenders generally use their current income to assess affordability but this is not necessarily the case for the self-employed. You will have to provide several years of accounts to prove your income and you may need to be able to explain any fluctuations in your income. For example, if the middle year of the last three years’ accounts showed a lower profit than the other two years, the maximum mortgage a lender will consider giving you may be based on this worst year. If the profit trend over the three years is downward, some lenders will decline to lend anything.
‘It will really be about the income that can be evidenced and so it will pay to understand exactly what the figures show and to be accurate,’ explains David Hollingworth, associate director at mortgage adviser London & Country. ‘Otherwise, it could result in heartache further down the line and wasted time in the search for the right mortgage lender. If there is fluctuation in income over the years then be sure to flag it early, as this could have a bearing on the mortgage selection.’
Make sure you understand your accounts so that you can present them successfully to a mortgage lender. If you can clearly explain fluctuations and what caused them, you stand a greater chance of getting an income than if you become flustered and stressed when asked about them.
Get on the electoral roll
One of the simplest things you can do to improve your chances of getting a mortgage when you’re self-employed is to ensure you are registered to vote. Despite being so simple, many people fail to do this.
Being on the electoral role helps lenders see that you are who you say you are. As mortgage fraud increased in the build up to the credit crunch, lenders realised they needed to vet their customers more thoroughly. This is one way of doing so.
To register on the electoral roll go to www.direct.gov.uk and enter your postcode under ‘local services’. The site will then provide a link to your council website.
Be the perfect borrower
As with any form of borrowing, the lender will want to know you are a safe bet. For self-employed people already being discriminated against, it is even more important to ensure you are an attractive borrower. Make sure any credit card payments are made on time, don’t bounce any cheques and get hold of your credit reference report to make sure there are no black marks against your name. The more you can show your lender you can handle money and credit, the more chance you have of getting the mortgage.
Credit check your business
As well as wanting to know your credit history and wanting to see proof of your income, the lender will also want to see how secure your business is and how well it has been managed.
‘Applicants should be aware that lenders will often do a credit check on the business as well as the home address and may want to see business bank statements as well as personal ones,’ says Ray Boulger, senior technical adviser at mortgage adviser John Charcol. ‘Any bad credit recorded against the business could result in you being declined a mortgage. This could be something like a small disputed supplier invoice that was not paid, and the supplier obtained a County Court judgment.’
So run a credit check on your business to make sure that what comes back is accurate and be prepared to explain anything that might count against you.
Speak to a broker
It always pays to seek advice when it comes to financial products. A whole-of-market broker may be able to find mortgage products you are unaware of. ‘If the borrower does have a good track record then they should have a very good range to go at from all the mainstream, high-street lenders,’ says Hollingworth. ‘If you don’t have the full two years of accounts then it could pay to take some advice to see if a broker is able to place the case. For example, if there’s a large deposit, one year of accounts and a projection is available, it may be possible to find a lender.’
Some lenders such as Kensington Mortgages have looked to differentiate themselves from the rigid rules of the high street and although more would be preferable, it can consider a borrower with only one year’s worth of accounts.
The lenders that help the self-employed
If you are self-employed you may feel as though lenders have turned their backs on you since self-cert mortgages were banned. But while all lenders should be able to help (so long as you have the right documentation), there are a choice few that are actively trying to assist self-employed borrowers.
Kensington Mortgages (kmc.co.uk) is a good option as it only requires customers to show one year’s worth of accounts. Meanwhile, Leeds Building Society (leedsbuildingsociety.co.uk) can accept one year’s accounts and an income projection, as long as you only want to borrow up to 80 per cent of the value of your home.
Aldermore (aldermore.co.uk) offers flexibility, claiming it will take into account factors that can cause credit score failure, such as those who are self-employed and disadvantaged by credit-scoring systems that favour salaried applicants.
‘Other lenders will tend to be on a case-by-case basis, so you might find that a lender such as Halifax can be flexible for certain borrowers with a good credit score but not for everyone,’ says David Hollingworth, associate director at London & Country.