Slightly more complicated for the self-employed to get a mortgage

There are many concerns in the current climates relating to job security and especially how lenders look at the self-employed following lockdown with regards to consistency of ongoing income and customer base.

The growth of self-employment, contracting and the gig economy has continued to challenge and change the make-up of the UK workforce over the past few years. Government statistics for 2019 saw the number of self-employed people rise to 4.93 million, some 125,000 more than a year earlier and this is a number which is only expected to grow.

As a specialist mortgage broker, we’re seeing a greater number of clients who are not only self-employed but who have a variety of income streams and different ways in which they generate their income. As the raising of the Stamp Duty threshold is set to encourage more first-time buyers into the housing market, and homemovers to take the next step up the property ladder, it’s vital that mortgage brokers are adept at meeting the ever-changing demands of such borrowers.

Moving forward, an even greater proportion of homebuyers will have a non-traditional income history and many differing forms of current income for lenders to contend with. Despite this sustained shift, it largely remains the case that those with a salaried or traditional source of income are far more likely to be eligible for mainstream mortgage deals than those with complex income scenarios. Having said that, there also remains a misconception that those missing out on the perceived favourable terms of high street lenders are unable to get a mortgage. Thankfully, there are a healthy number of lenders - some on the high street, many more not on the high street - who have competitive product ranges and flexible criteria in place which can service the needs of the self-employed workforce or those with multiple income streams. A large proportion of these products are available through specialist lenders and some can only be accessed via a mortgage broker.

It’s always been slightly more complicated for self-employed people to obtain a mortgage and – especially over the short-term - this may get even tougher when you consider additional Covid-19 complications. The rise of self-employment and the gig economy will undoubtedly continue. And with many underlying lending restrictions still in place, especially at higher loan-to-value levels, this really does magnify the importance of good, professional advice in helping self-employed clients and those with more complex incomes to achieve their homeownership goals. 

Being Self Employed shouldn't affect you getting a mortgage.

A large myth suggests that because you are self-employed, you will find it harder to get a mortgage. Maybe that was so a few years ago, but not today.

Yes, the financial crash took its toll on the self-employed and quite rightly killed off the ‘self certification’ type deals (no proof of income).  But today lenders are quite happy to lend to those who are self-employed and have a good track record.  The majority of lenders require two years accounts and will tend to average your last two years figures.  However, there are also some lenders who will look to assist you even if you are in your first year.  Some will also consider just last year’s figures, even if you have been self-employed for longer.

Generally, the longer you’ve been self-employed and the more years accounts you have, the larger number of lenders you will have who are willing to assist.

Some lenders do not require to see your full accounts but will require an accountant’s certificate to be completed.  This differs lender to lender. Some will require a full set of accounts and/or an accountant’s certificate!  Some will require this and/or tax year overviews and more.  All can be requested via HMRC.

They may also require to review business bank statements to review day to day cashflows and possible projections for future income, including potential contracts, etc.

This can also change depending on the make up of your self-employment, whether a sole trader, partnership, Ltd company director and so on.

Deposit requirements can range lender to lender, but the bigger deposit you have, the greater the number of deals will be available to you.

Finally, plan ahead.  Six months ahead of your mortgage requirements, make sure you have your house in order.  Check your bank statements are in good order, check you have the right accounts and relevant paperwork from your accountant.  Don’t have too many credit searches in a short amount of time as this could affect your credit score.  Ensure you are on the electoral role and have decent breathing space on card limits and loans.  All of this should put you in a good position before the lender even looks at their ability to lend to you!

Self Employed? Not a problem..

A large myth suggests that because you are self employed, you will find it harder to get a mortgage. 

Maybe that was so a few years ago, but not today. 

Yes, the financial crash took its toll on the self employed and quite rightly killed off the ‘self certification’ type deals (no proof of income).  But today lenders are quite happy to lend to those who are self employed and have a good track record.  The majority of lenders require two years accounts and will tend to average your last two years figures.  However, there are also some lenders who will look to assist you even if you are in your first year.  Some will also consider just last year’s figures, even if you have been self employed for longer.

Generally, the longer you’ve been self employed and the more years accounts you have, the larger number of lenders you will have who are willing to assist.

Some lenders do not require to see your full accounts, but will require an accountants certificate to be completed.  This differs lender to lender. Some will require a full set of accounts and/or an accountants certificate! Some will require this and/or SA302s, tax year overviews and more.  All can be requested via HMRC. 

They may also require to review business bank statements to review day to day cashflows and possible projections for future income, including potential contracts, etc.

This can also change depending on the make up of your self employment, whether a sole trader, partnership, Ltd company director and so on.

Deposit requirements can range lender to lender, but the bigger deposit you have, the greater the number of deals will be available to you.

Finally, plan ahead.  Six months ahead of your mortgage requirements, make sure you have your house in order.  Check your bank statements are in good order, check you have the right accounts and relevant paperwork from your accountant.  Don’t have too many credit searches in a short amount of time as this could affect your credit score.  Ensure you are on the electoral role and have decent breathing space on card limits and loans.  All of this should put you in a good position before the lender even looks at their ability to lend to you! 

Buy to Let now with free valuation and free legals (including purchases*)

With the year end closing in fast, and new regulations only just around the corner, we are starting to see some lenders advising their plans for next year.  Many lenders have increased targets and AToM has been in contact with a number who are looking to launch or re-launch (having been dormant) during the coming months.  The majority of industry pundits, including myself, don't believe rates will now change until late 2016, or early 2017.  So with a slightly quieter market, competition, especially rates, should be fierce for the remainder of this year and moving into next year.  This can only be good news for the end consumer.

For those with Buy to Let / Investment property interests, we have seen new lender, Foundation Home Loans, stir up the market as they have launched products with free valuations, free legal costs and will accept customers who have no minimum trading period on employed or a self employed basis and no minimum income requirements.  This is in addition to looking at customers who may have had a blip or two on their credit history.  Although a recent new entrant to the market, Foundation have an appetite to lend and are innovative.  I think we will see a lot more from them in 2016.

Another lender has launched a five year fixed rate for Buy to Lets with a rate sub 4%.  This whole sector will remain buoyant while the rental market continues to grow at a substantial pace.

Nationwide House Price Index confirm UK house prices increased by 0.6% in October, with the annual price growth edging up to 3.9% from 3.8% in September.  The average house price now stands at £196,807!

And finally...due to an increase in business volumes, we’re looking for staff to join our expanding AToM team.  If you know someone in the mortgage sales sector, with the relevant qualifications (or studying towards them) and who likes to be kept very busy, then please ask them to get in touch! 

Lenders are targeting the Self Employed..

Mortgages for the Self Employed have been sparse over the last few years.  Despite providing a huge part of the economy, lenders have been reluctant to lend to this area.  However,  lenders have now recognised this and are looking more positively to assist the 4.5m self employed (figures as at end of 2014).  A few lenders will now even offer mortgages to those with just one years accounts (up to 85% of the property value), although, in the main, the normal requirement is to have two years audited accounts.  In all instances the lender will need to prove suitable affordability and a deposit will be required, but this is a huge step forward from just a few months ago. 

There are also lenders lending in this arena that will cater for customers who may have a missed mortgage payment in the last 12 months or may have Defaults and/or County Court Judgements (CCJs).   Terms and conditions apply, and lenders must prove ‘responsible lending’, but where there is demand, there will always be supply.

The other area that continues to be on the increase and something of a headache for lenders is ‘lending in to retirement’. As we all know, life doesn't end at age 65-70 and neither should it on the high street!  Often, retired people have managed their finances successfully over the years and enter retirement mortgage free.  At the same time, many, whilst having no mortgage, also suffer from reduced income and there is a saying in our profession that it is not always wise to have everything tied up in bricks and mortar and yet have nothing to spend.  Others may wish to continue their mortgage past normal lender retirement age, whilst they may still be working.  There are schemes where equity can be turned into a mortgage (not equity release) and where off-spring may be able to assist with the repayments in order to secure and protect their inheritance whilst also ensuring a comfortable retirement for their parents.  This is not right for everyone but it is certainly worth talking to a qualified advisor to review all possibilities.

Mortgages for the Self Employed or Over 65s

Mortgages for the self employed have, over the years, sometimes been as difficult and as scarce as those for First Time Buyers.   Lenders have noticed this and a few have taken action.  Over the last couple of weeks, we’ve seen some lenders launch products just for the Self Employed.  Specifically aimed at those newly self employed and with minimal accounts.  Although not household names, specialist lenders have funds to lend and a desire to create products to assist gaps in the mortgage market.  For instance, the usual requirement on the self employed is 2 or 3 years accounts and possibly the SA302 returns from the Inland Revenue.  The specialist lenders, for the right deposit, will allow just 1 years accounts to prove income, normally with an accountant projection for the second full year and probably up to six months personal and business bank statements.

Product innovation is key in the current climates, when volume is not necessarily the be all and end all.  As mentioned, specialist products to fill gaps are high in demand.  We’ve seen some lenders insisting on repayment of their mortgage around age 70 regardless of the clients circumstances and others will no longer allow 'sale of property' to be an acceptable repayment option at the end of the term for those currently with interest only.  Customers are seeking solutions.

One lender, through AToM, has provided one solution to the ‘lending in retirement’ conundrum. Often, retired people have managed their finances successfully over the years and enter retirement mortgage free.  At the same time, many, whilst having no mortgage, also suffer from reduced income and there is a saying in our profession that it is not always wise to have everything tied up in bricks and mortar and yet have nothing to spend.  Others may wish to continue their mortgage passed the normal lender retirement age, whilst they may still be working.  There are schemes where equity can be turned into a mortgage (not equity release) and where off-spring may be able to assist with the repayments in order to secure and protect their inheritance whilst also ensuring a comfortable retirement for their parents.  This is not right for everyone but it is certainly worth talking to a qualified advisor to review all possibilities.

Time being called on Interest Only?

There has been much hype recently regarding Interest Only and Repayment mortgages. With an Interest Only mortgage, you only pay interest and no capital and so, at the end of your chosen term, you still owe the lender the same amount as when you began. Normally with this method, it is recommended that you contribute to a saving or investment vehicle to generate funds to repay the mortgage at the end of the term. However, this is usually optional.

With a Repayment Mortgage, you pay both interest and capital each month. Initially, this appears more expensive, but does mean that you pay back the loan with no debt outstanding at the end of the term assuming you meet the required payments on time.

Many lenders have recently tightened their requirements on Interest Only mortgages. Some will not allow this method above certain loan to value levels. Others charge higher interest rates and many are trying to persuade customers to switch from interest only to repayment.

Why the recent attention to these repayment options? Simply, because many borrowers have stepped onto the property ladder choose the cheaper option promising to review their payment plans at a later date. The problem is that the ‘later date’ never seems to arrive! As we all know, people generally live to their means. Many borrowers on this scheme have no savings or viable plans to pay back the debt and this is worrying!

That said, Interest Only mortgages can be right for certain professions - people entitled to annual bonuses: the fluctuating income of self employed: or employments where lump sums are received after a number of years in service.

This debate is gathering pace so expect to read more in coming months.

Finally, do you know the full details of your own mortgage? A recent Consumer Financial Education Body report suggests that 15% of mortgage holders are unaware of their current repayment style or interest rate! As this is the largest debt you are likely to take, it seems crazy not to understand it! We are quick to change mobile, broadband or utility provider the minute rates start to increase. This mentality should also be applied to mortgages. Always be on top of your mortgage. Otherwise it could cost you a small fortune.