Mortgages Guide | Mortgage Help Product Information

TheMoveChannel.com | Mortgages for the Self-Employed

Introduction

The realm of self-employed mortgages can be a little confusing. As with other sectors of the market, the various different products often get called various different things: self-employed mortgages, self-certification mortgages, non-status mortgages and so on. But to further confuse matters, there is substantial crossover between the different types, with some self-certification loans open to people in full time employment and others restricted only to those who are self-employed.

Contrary to popular belief, a large number of self-employed workers are actually able to get a normal mortgage from a traditional lender. However, it isn't easy. Most mainstream banks and building will classify self-employment into two types - those people who have been self-employed for more than 3 years and those who have been self-employed for 3 years or less.

Lenders normally rely on the salary of an individual to assess the means at their disposal for repaying the loan. But without the usual PAYE slips of P60 forms, self-employed lenders require customers to prove their salary based on their accounts.

They generally require the self-employed to have at least 3 years' worth of audited accounts showing consistent profitability. If this can be shown - and plenty of self-employed people can - then there is not usually a problem in finding a lender willing to loan money on normal terms.

However, it is not always so straightforward. The first problem is that the need for 3 years' can often mean that the borrower needs to have been trading for a lot longer. Since accounts are prepared annually in arrears, this means that a minimum of 4 years solid trading history is usually required in order to get a mortgage, probably a lot more when you consider that most businesses don't make a profit in their first two or three years.

Secondly, many business owners pay themselves nominal salaries, but often take substantial dividend payments or a share of the profits, in order to minimise their tax burden. Furthermore, modern accounting practices are often aimed at reducing the apparent income of the individual concerned, which can often leave their income looking, on paper at least, to be pretty minimal. So while many applicants may actually be earning big money, they will still struggle to get a mainstream mortgage, even if they do have the necessary number of years' worth of accounts.

For those self-employed borrowers who are unable to get a mainstream mortgage for one of these reasons, or because they have simply not been trading for long enough, the only realistic option is to go for a self-certification mortgage.

Self-Certification

Self-certification mortgages, also known as non-status mortgages, have shot to popularity thanks largely to changing work practices in the last couple of decades that have left a large number of people on short term or part time contracts, or dependent on bonuses for a sizeable portion of their income.

Self-certification mortgages are for people whose income is difficult to assess using the standard methods adopted by most conventional mortgage lenders.

Bonuses, commission and seasonal work can cause income to vary over time or be difficult to guarantee and this may not be considered acceptable in order to get a mainstream loan. Many customers who go on to be excellent mortgage customers with specialist lenders routinely fail credit scoring processes with mainstream lenders. While most self-certification mortgages are also available to the self-employed, they are not exclusive to them and some of the following groups also opt for this type of product:

  • Unsalaried company directors
  • Contract workers (increasingly common in technology-based industries)
  • Commission-based workers (often in sales, recruitment etc)
  • People with seasonal earnings
  • Those with more than one income
  • City workers or others who receive a high annual bonus
  • Employees from other sectors such as the airline industry, who have complicated systems of bonuses and allowances that make conventional documented proof of income problematic.
  • Borrowers on a low wage who have an inheritance fund or other family income
  • Freelance workers

Self-certification is the process by which the amount that a customer borrows is based on what they claim is their income as stated in a signed declaration in the application form, but where they don't have to prove it on the basis of their accounts. There is no need to supply accounts, bank statements or any other proof of income. Instead the lender will take up bank and lender references, credit checks, solicitors' confirmation of previous ownership and landlord's reference.

Sometimes it will be possible for people from within the various groups mentioned above to obtain a normal mortgage. If you have a good credit history, can show a consistent level of regular income over a number of years, have the bank statements or business accounts to prove it and can show that you are not such a high risk, then you should be able to get a conventional mortgage deal at a conventional rate of interest.

Self Certification Product Types

As with most other types of non-conforming mortgage, the range of self-certification home loans is always growing and diversifying. There are now over 100 self-employed specialist and self-certification lenders on the market and it is usually possible to find the full range of mortgage products.

Some lenders offer as many as ten different self-certification products, giving borrowers almost as much choice as their mainstream counterparts. Fixed, discount, flexible, cashback, 100% and buy to let mortgages are now all available to those borrowers wishing to self-certify.

Most importantly, given the varying earnings pattern that applies to many self-certification borrowers, many of the products now on offer come with a good selection of flexible features, including daily interest calculation, overpayments, payment holidays and drawdown facilities.

The only downside is that the interest rates still tend to be marginally higher than a mainstream mortgage. This is not entirely surprising, particularly where the self-employed are concerned. Statistics show that the majority of businesses fail within first two years, so lenders tend to reflect this additional risk in a higher interest rate. Similarly, the risk of delinquency is slightly higher among those with fluctuating earnings and non-guaranteed bonuses than with those who make it through the normal credit scoring systems, so it is understandable that there is something of a risk premium to be paid. But again, as with other non-conforming mortgages, competition is lowering the rates on offer to self-certification borrowers, making the difference barely noticeable at times.

For some reason, many tracker mortgages in this sector tend to be tied to the LIBOR rate as opposed to the Bank of England base rate. The LIBOR is the notional rate at which banks agree to buy and sell money at some point in the future. This measure is market driven and therefore tends to be a little more volatile and quick to react, often pricing in changes before they are decided by the MPC.

Lending Criteria

There are essentially three types of lender in the self/employed and self-certification market - sub prime lenders, cherry pickers and the specialist lenders.

  • Sup-prime lenders gear their products to people with bad credit, so the rates are unnecessarily high.
  • Cherry pickers select only the lowest risk customers, often those self-employed applicants with the necessary accounts and proof of income.
  • Specialist lenders are likely to look at income from all sources and will use experienced underwriters to conduct an individual assessment rather than use any normal form of credit scoring.

Self-certification mortgages are offered on the basis of the customer stating what their likely income will be rather than by providing documentary evidence. This is not just an open invitation for borrowers to overstate their income - lenders are well aware of the levels of income that can be attained in most occupations. They also have the opportunity to run additional checks where something looks unusual, using bank statements, references from existing lenders and credit information databases to build up picture of an applicant's financial conduct. If you are a part time dinner lady claiming an income of £150,000, this will not go unnoticed.

To help your case when applying for this type of mortgage, it can be a good idea to present a CV with full details of your employment history. Keeping and presenting bank accounts from a longer than required period of time can also be a good idea, especially if you can demonstrate your track record for things like credit card payments and remaining within an agreed overdraft limit.

Allowing borrowers to self-certify can be risky for lenders and requires the use sound underwriting practices on their behalf. But as well as raising the interest rate to compensate for the risk, many self-cert lenders also:

  • Require a deposit of at least fifteen percent.
  • Conduct an extensive credit search covering last three years. Applicants with a bad credit history are not normally considered and will normally have to go to a more expensive sub-prime lender.
  • Insist upon fairly stringent LTV requirements, usually requiring a deposit of at least 15 percent.
  • Lenders probably rightly believe that few borrowers will risk large amounts of their own money by overstating their income and overstretching themselves unreasonably.