Work for yourself and still get a mortgage

The days of having a job for life are over for most of us, and today’s employment world is a very different place compared to a decade ago.

Office for National Statistics figures for February to April this year show that there are 3.8 million self-employed workers in the UK, up 14.5 per cent on 2000.

More and more of us are ditching our bosses in favour of working for ourselves and some are doing several jobs at once. But all this just makes it harder to get a mortgage… or does it?

As society evolves, so too does the mortgage market, and financial aids like self-certification mortgages are becoming cheaper and less restrictive.

What is self-certification?

Self-cert mortgages were created to help borrowers with several sources of income, from say annual bonuses or commission, making it difficult to provide enough proof of earnings to satisfy a mortgage lender.

For some self-employed people, earnings are difficult to document fully because mortgage lenders ask for two to three years’ accounts when you may only have been in business for a year. Also, accountants naturally minimise earnings to produce a lower tax bill, so business accounts are unlikely to give a good picture of what a mortgage applicant can afford to borrow.

But it is not just the self-employed who make use of self-cert mortgages. Employees with multiple income streams – perhaps a rental income or trust fund not traditionally considered when they apply for a standard mortgage – can also find self-cert useful.

What are they?

Self-cert mortgages essentially work like other mortgages, except that, importantly, you are not expected to document fully how much you earn.

But don’t be fooled into thinking this gives you carte blanche to buy the mansion of your dreams. If you say you are employed as a street cleaner on a salary of £90,000 a year, questions will be asked. Remember, lying on a mortgage application form is a criminal offence.

Self-cert mortgages have come under the spotlight in recent years, particularly following BBC coverage alleging that some mortgage advisers and lenders had been encouraging people to inflate their income during the heady days of the property market boom.

The illegality aside, another reason it may not make sense to choose a self-cert mortgage is that they cost more than standard mortgages. Generally you need to provide a bigger deposit, and the interest rate you pay on the money you borrow will be higher, on a smaller choice of mortgage loans.

Louise Cuming, head of mortgages at price comparison site Moneysupermarket. com, says: “Although unproved, stated income must reflect income received by the client to ensure the mortgage is affordable – and clients going down the self-certification route should understand that lenders reflect the higher risk of these products in the rates they charge.”

Cuming says that for a ‘next-time buyer’ rather than a first-timer, looking to borrow 90 per cent of a property’s value, there are 562 self-cert products available. This compares to 2,160 options if you can prove your salary.

David Hollingworth of brokers London & Country Mortgages says competition has hotted up, with more lenders coming into the market, particularly over the last 18 months.

“That’s good for the market,” Hollingworth notes. Generally, however, he says you will pay between 0.75 and 1 per cent extra for a self-cert mortgage.

While typically lenders want you to put down a deposit of around 15 per cent for a self-cert mortgage, or 25 per cent in some cases, others are more flexible.

Lenders like Mortgage Express, Bank of Ireland, Bristol & West and Platform will lend you up to 90 per cent of a property’s value. A handful, including Amber Home Loans, will go to 95 per cent in some cases.

John Charcol mortgage expert Ray Boulger says lenders typically now offer self-cert mortgages in three tiers: loans of up to 75 per cent of the property’s value, which will have interest rates not too different from mainstream rates; loans up to 85 per cent, which will have a slightly higher rate; and those up to 90 per cent, which will be higher again.

Cuming points to Amber Home Loans, which offers a fixed-rate deal to June 2009 at 5.99 per cent for those with only a 5 per cent deposit, although you will also have to pay a higher lending charge.

Meanwhile, with a 10 per cent deposit Bank of Ireland offers a 5.09 per cent discounted deal to the end of September 2009, with no higher lending charge.

But if you have a 25 per cent deposit, Moneyfacts.co.uk shows Standard Life Bank is offering a 4.5 per cent deal for two years. A conventional two-year fixed-rate mortgage (at time of writing) from Portman Building Society charges 4.59 per cent.

Both Hollingworth and Boulger point out the tendency for people to think that because they are self-employed, they will need a self-cert mortgage. But this is not necessarily the case.

“Whether you need a self-cert mortgage doesn’t depend on whether you are employed or self-employed,” Boulger says. “It depends on whether you can prove your income.”

There are other options to be considered too, if you have a good-sized deposit and solid credit rating, such as fast-track mortgages or applying directly online, which may not always involve income verification.

Seeing a mortgage adviser can also be useful to ensure you find the best option for you and they often have deals that may not be available to people straight off the street.

Taking a less traditional approach to employment does not, therefore, have to mean being penalised when it comes to getting a mortgage. Likewise, however, be sure not to end up with a self-cert deal, and a higher rate of interest, if you do not need it.

When Mary and Paul Green returned from 15-years living in Washington DC, they set about finding a property to buy in London.

But Paul had left his job in America and while he had a new one lined up in London, he did not yet have the proof of income lenders require to get a mainstream mortgage.

The couple, who are in their 50s, did some online research did some searching on the Internet while in the US and then checked out all the major banks for mortgage deals when they arrived back in the UK. But they wanted to make sure they left no stone unturned in getting the best deal.

“It seemed to us that the mortgage scenario had changed quite radically when we were away. There seemed to be an awful lot of choices and different permutations available,” Mary says.

A real estate agent recommended they speak to mortgage brokers Alexander Hall, which they did. Alexander Hall set them up with a five-year fixed-rate self-cert mortgage at 4.75 per cent from Mortgage Works, with a 19-year term. Mortgage Works is the specialist lending arm of the Portman Building Society.

The pair took out a £390,000 mortgage on a £630,000 property in Clapham Common and completed the deal in December last year.

“We wanted information about all the choices as we weren’t quite sure exactly what we wanted. We did get excellent advice from Alexander Hall and had various options presented to us. It was very efficient and this seemed to be the best fix for our circumstances,” Mary says.