Lenders are gaining confidence in lending to self-employed borrowers. Greg Cunnington of Alexander Hall highlights the best mortgage deals on offer for the self-employed and explains how to take advantage of them
There have been further improvements in the number of mortgage products available, with just under 5,000 mortgage products now on the market.
This is an increase of over 300 products in the last two months – offering the biggest choice since before the Covid-19 pandemic. It has led to some very competitive mortgage rates being available, and we are also seeing mortgage lenders provide more favourable criteria – meaning more borrowers are eligible for deals.
But what if you are self-employed? We discussed in a previous article on the topic how there has often been a misconception it is tricky for the self-employed to obtain mortgages, or that lenders look unfavourably upon these applications.
But, with help from an intermediary this does not need to be the case because we regularly help self-employed clients get good mortgages.
Here, we will explain why mortgages for the self-employed can mean extra questions and documentation requirements, and how an intermediary will ensure you still get a good rate. With help, you can benefit from this year’s improvements in the mortgage market.
How are self-employed mortgage applications assessed?
Lenders now send applications for self-employed clients to specialist underwriting departments (the decision makers) who assess the proof of income documents, such as your accounts or HMRC tax year calculation documents.
Typically, they will now view the most recent three months’ business bank statements, to check the income and activity here.
They also sense check the industry and line of work you are in to assess whether the lending requested is sensible and that your business is operating at similar levels to the income figures you hope to base the mortgage on.
How an intermediary can help
A good intermediary knows the lender’s criteria for self-employed individuals, and so ensures your application is steered to a lender which is comfortable with your scenario.
For example, some lenders will use net profit for limited company directors whilst some will take the salary and dividend figures as your income. There can be a big difference between these. Therefore, if it’s not done correctly at the start, a frustrating amount of time will be wasted when the borrowing comes back lower than hoped.
Alexander Hall has exclusive access to the decision makers and escalated service teams with many lenders. So, by using an intermediary such as us, your application will be reviewed quicker than if you use a lender directly.
Also, if any issues arise, we are on hand to help smooth them through with the lender to avoid long delays.
We also have plenty of experience assisting self-employed clients in recent months, ever since lenders began their more manual assessments.
This means we know who is more likely to be more favourable to your individual scenario, and we understand how to best present this to the lender.
You can see some recent examples of how our lender access and relationships assist our clients here.
Lender criteria changes
Here’s some further good news for the self-employed: we have seen some really positive criteria changes recently, targeting self-employed customers.
Santander, one of the largest mortgage lenders in the UK, has a policy whereby clients whose accounting year 2020-21 was adversely affected by Covid will have this year discarded. Instead, the 2018-19 and 2019-20 accounting periods will be used for the mortgage assessment.
However, Santander is also currently capping self-employed applications to 75% loan-to-value (LTV) – which means borrowers must have a deposit of at least 25% to put down – and will also do a manual underwrite on each application.
An intermediary can ensure your application is fine to proceed with them, as we can speak to a decision maker there for your pre-application.
Clydesdale and Metro Bank will both now use pre-tax profit and salary for limited company directors as income for the affordability and maximum borrowing for the mortgage.
We also have access to several other lenders that will now use net profit and salary, instead of just salary and dividends. This can be a great option where money is retained in the business.
As an example, we had a recent case study where our client had a pre-tax profit and salary of £80,000. The net profit and salary was £60,000.
By using a lender who could use the pre-tax figure, this meant the client could borrow an extra £100,000 on their mortgage.
We also have access to some specialist self-employed lenders who require one year’s accounts only, where your business is newly established (most mortgage lenders require two years’ accounts to be available). Alternately, they can use only your latest year’s income figure for the mortgage where your business has been on an upward trajectory.
These positive changes show that mortgage lenders have gained confidence in lending to self-employed individuals, looking more favourably on and catering to their applications, with some strong recent support for this market.
You can check out some of the live best buy deals available here.
Warning: Be aware of accounts’ deadline
One thing self-employed applicants must be careful of is the majority of mortgage lenders require proof of income to be dated within the last 18 months.
As such, if you are a sole trader, partner or a limited company director looking to supply your tax year calculations to evidence your income, these will need to be available for April 2021.
With the HMRC deadline to complete these being January 2022, we often meet clients with April 2020 as their last available calculations, who are initially unaware of this requirement.
As such, to ensure you have as many options available as possible, you should look to finalise your accounts and submit your tax return for 2021 if you can.
Alternatively, we have access to a couple of specialist lenders that can work from the previous year’s accounts, so please contact us to discuss this option.
What if I have been using SEISS grants and government support?
During the pandemic period, many self-employed individuals took advantage of the Self-Employed Income Support Scheme (SEISS) and other government support.
By taking the grant, you confirmed your trading was impacted by the pandemic, so initially many mortgage lenders automatically declined applications from self-employed individuals where these grants had been taken.
The good news is that as many of these businesses are back trading once more, lenders are taking a more pragmatic view.
We now have access to several lenders who can accept applications from individuals who took an SEISS grant, many with market leading or similar rates.
One consideration to be careful of is, despite being interest free, the grants have to be repaid. Lenders will take the monthly repayment as a credit commitment when assessing how much you can borrow.
Where your latest accounts are complete this amount should show, if not it will need to be calculated. By using an intermediary such as Alexander Hall, we can help guide you through what documentation will be required, and who the best lender will be for your circumstances.
See how much you may be able to borrow here, or for a more accurate assessment, please get in touch to speak to one of our advisers directly.
What documents do I need?
One of the main issues self-employed clients cite is the documentation requirements. This has become increasingly important now that lenders do a more detailed assessment on applications for self-employed individuals.
A good adviser will discuss all documentation requirements in full with the lender before the application to ensure there are no delays. They will also help a client understand where to obtain these documents, and learn exactly what the lender requires.
An adviser will also be able to look through the accounts like an underwriter, so any questions the lender may ask can be spotted in advance.
It’s a good idea to have the following documents ready:
- Two years’ tax year calculations and tax year overviews. These can be obtained via your accountant or directly from HMRC. They can normally be accessed and printed out online, which is a real time saver.
- Two years’ full company accounts (for partnerships and company directors). These need to be signed by the accountant and the company director.
- Accountant’s reference – some lenders will have an accountant’s reference template that can be used instead of the above, which can streamline the process
- Three months’ personal and business bank statements
- An updated CV and two-year records of contracts for contractor clients.
Please get in touch with us if you need any further advice. You can email us at: AskAlexanderHall@alexanderhall.co.uk or use the contact us page on our website.
Greg Cunnington is director of lender relationships and new homes at Alexander Hall
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT
