Things are very different now than they were 10 years ago for those looking to secure a mortgage and the self-employed have been particularly hit with restrictions from cautious lenders. But rest assured, there are options out there, so long as you have all your ducks in a row and your books in order.
Since Britain was hit by recession in the late naughties more and more people have been hit by redundancy and started their own businesses as a result. During the boom years large loans were available to almost anyone to start up their own business with little consideration given to ability to repay, business acumen or credit history.
Lending criteria is much stricter now, especially for the self-employed, which is essentially a good thing for borrowers and lenders alike. But running your own business doesn’t mean mortgages are completely inaccessible, you just need to prove you are a safe-bet to those holding the purse-strings.
The main aspect that lenders will consider when it comes to applying for any type of loan is, naturally, your ability to pay it back and this is harder to prove for self-employed individuals as they have to take control of their own tax and pension contributions. However, the longer a person has been running their own business the easier it will be to secure a mortgage.
Bernard Clarke, spokesperson for the Council of Mortgage Lenders, explained to What Mortgage what exactly the ins and outs of mortgage procurement for the self-employed are.
Restrictions
“The reason that there are so many more restrictions on the self-employed when it comes to getting a mortgage is that the repayments are a long-term commitment and lenders are obliged to assess the borrower’s ability to pay and how affordable it is, based on both current and possible future circumstances.
“Some self-employed people may have greater uncertainty about their income and work prospects than those in employment. Lenders will also take into account other factors affecting the riskiness of the loan, such as how much the customer wants to borrow relative to the value of the property or their income, other financial commitments, the borrower’s credit history and how they might be affected by a change in their circumstances.
“It’s in the best interests of the customer, as well as the lender, that there is a plausible answer to all the questions that are relevant.”
Evidence of income
Clarke expands that those who can show a longer record of successfully managing their businesses are more likely to be in a position to take on a mortgage with confidence.
“Successfully running your business over a number of years – and being able to provide evidence of a large enough income to meet your mortgage commitments – will provide greater re-assurance for you and the lender. Those who have recently started out may find it more difficult to get a mortgage offer, but might want to consider talking to a specialist broker. Not all lenders take exactly the same approach and, if you are turned down by one firm it doesn’t necessarily mean that others won’t consider you.”
Proof of income, of course, is essential for lenders when they consider giving out any loan.
Saving for a deposit
Earning an income large enough to meet your mortgage commitments will help in any situation, says Clarke, as will having a clean credit history, which will improve your chances considerably.
“Showing evidence of having saved for a deposit over a period demonstrates commitment and the right kind of approach to long-term planning. And if you’re turned down initially, don’t give up hope. Saving for a larger deposit or running your business successfully for a longer period of time will improve your chances of a successful application in the future.”
Lenders’ criteria
Lenders will take everything that is relevant into account when deciding if the mortgage you are looking for is affordable and sustainable.
“The key things are how long you’ve been running your business, the reliability of your income, the size of your deposit, how much you want to borrow-relative to your income, the value of the property, your payment history and how you would cope with any foreseeable change in your circumstances,” Clarke advises.
HSBC has some good mortgage rates accessible to the self-employed. Head of mortgage products, Peter Dockar, told What Mortgage what the bank considers when the self-employed apply for a loan to purchase a property.
“When assessing a mortgage application for self-employed applicants the only difference is in relation to the proof required to establish their income.
“Due to the fluctuating nature of a self-employed applicant’s income, we generally require the last three years’ signed, audited or certified accounts or tax returns in order to prove income.
“As a responsible lender, the primary concern is always the ability of the applicant to meet the regular monthly payments as they fall due.
“The products and rates available to self-employed applicants do not differ to those offered to all other applicants.”
As always it’s essential to speak a range of lenders, including your own, to do plenty of research and to be aware of the commitment you are making when taking out any mortgage but also stay positive; there are lenders out there who will be happy to help with a loan, so long as you meet their criteria.
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