Gone are the days of self-certified mortgages. Referred to by some elements of the media, post credit crunch, as ‘Liar loans’, these self-certified mortgages were quickly outlawed by a Government keen to protect the system from some of the excesses of the first half-decade of the new millenium.

Self-certified mortgages were a relatively easy way for self-employed borrowers or contractors to obtain mortgages even when they had fluctuating and unpredictable income streams. After all, being self-employed can be many good things, but a stable and predictable revenue is rarely considered one of them.

Post 2008, as lending criteria has tightened and lenders’ criteria has become even more regulated, the number of people in the UK that describe themselves as self-employed has risen dramatically from 3.3 million in 2001 to 4.8 million now. Of course, whether you are an employee, a contractor, a sole trader or a company director, you will all be required to illustrate two things when applying for a home loan; namely income and outgoings.

As an employee, two or three years stable employment and a steady pay cheque backed up by the appropriate P60s will usually be all that’s required to set the ball rolling. As a self-employed applicant things can be a little more complicated. First of all, you need to illustrate a stable income that is sufficient to service your proposed loan. To do this you’ll probably need to apply for an SA302. HMRC will provide this for you but you need to start the process sooner rather than later.

In addition, it helps a lot if you can supply two or three years of audited accounts. Most lenders will want to see accounts by a Certified or Chartered Accountant and when considering income streams they will have varying methods for arriving at what is deemed to be your income.

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If you are the director of a small or medium sized business with several shareholders and you take the majority of your income through a fixed annual salary you are more likely to be seen as an employee for all intents and purposes. If you own the business and it is healthy and profitable there should be no problem. However, where most self-employed applicants discover they may have a problem is when they are taking a relatively low salary and supplementing it with annual dividends. This may be sensible from a tax management standpoint but when trying to illustrate income it doesn’t help your case if your income varies year by year or is largely dependent on discretionary bonuses.

Illustrating profitability is another hurdle to overcome for many small businessmen who are used to reducing taxable profit as much as they can in order to retain capital in the business! Streamlining your tax affairs can come back to haunt you when you are trying to illustrate the your business’ real potential.

If your business income is rising year on year a lender will usually take an average over say the last three years but if it has been erratic or falling they are more likely to take the lowest, most recent year for their purposes.

In large part, assuming that you enjoy a reasonable level of income, obtaining a mortgage as a self-employed person is more to do with being organised than anything else. Have up-to-date accounts available, ideally for the last two or three years will make a big difference. If you take the bulk of your salary as a monthly salary this should help, as will a history of rising profits and/or personal salary. If your spouse works in the business too, spreading your household’s income over two pay cheques might be advisable from a tax perspective but a lender may be nervous lending on a multiplier based on one source of income.

As with all borrowers, try to spend six months before you apply trimming down unnecessary expenditure and eradicate any ‘red flags’ from your bank statements such as online gambling payments! You are trying to impress your lender with a history of financial stability and probity after all.

All-in-all, modern lending criteria are largely based on mitigating risk both to the lender and the borrower. After all, no-one wants another financial crash driven by irresponsible home loans. If you are able to ‘jump through all the hoops’ it should not matter whether you are employed or technically self-employed although if there is one area of the mortgage sector where good advice can be a real benefit it is here.

If you are self-employed and would like to explore mortgage options contact Mortgage Required for an initial, no-obligation consultation.

For more information or to speak to an adviser, contact Mortgage Required for a no-obligation chat on 01628 507477.

 

Your home may be repossessed if you do not keep up repayments on your mortgage.

There will be no fee for Mortgage Advice. There may be a fee for arranging a mortgage. The precise amount will depend upon your circumstances, but we estimate it to be £399.

Mortgage Required Ltd, Finance House, 5 Bath Road, Maidenhead, SL6 4AQ is authorised and regulated by the Financial Conduct Authority reference 573718 at www.fca.org.uk.

The Financial Ombudsman Service is an agency for arbitrating on unresolved complaints between regulated firms and their clients. More detail can be found on their website: www.financial-ombudsman.org.uk

Call: 01628 507477