Mortgage – Text
Check unknown vocabulary before you read the text:
Commonplace – something that is ordinary
Mayhem – needless disturbance; the unlawful crippling of another person
Unquestionably – beyond any doubt
High street – the main street with the best shops
Underwrite – to assume financial responsibility for; guarantee against failure
Dub – use another name for something; to re-name
Opt – to make a decision; to choose
Payslip – a slip of paper with a person’s salary info
Severely – harshly; strictly
Rat race – a continual and tiresome routine
Knock-on effect – consequences, further results of an action
Can the self-employed get a mortgage?
If you‘re self-employed, you might be enjoying being your own boss. But getting a mortgage will be difficult. A lot more difficult!
According to the Office for National Statistics, self-employed people now make up 14 per cent of all employed people, and temporary workers a further six per cent. In many professions, contracting or freelancing is the norm. Journalism, certain legal professions, writing and translating, IT, and the arts are all sectors where self-employment is commonplace.
But although self-employed workers can theoretically qualify for the same mortgage deals as employed workers, they might find they have to shop around to find a lender which will accept their application. It’s mortgage mayhem.
Obtaining a mortgage if you are self-employed is unquestionably harder than it was five years ago, but it is not the impossibility that some would have you believe. The key is finding the right lenders to speak to. Many computer-driven high street lenders are not the right place; instead, self-employed borrowers should speak to lenders who operate traditional underwriting models, with a human making the decision.
Before the credit crunch, self-employed borrowers could opt for self-certification mortgages, which meant the borrower didn’t have to prove their income. In 2007, almost one in four residential mortgages was granted on a self-cert basis. But the mortgage deals, dubbed ‘liar loans’ due to the potential to exaggerate income and take out larger mortgages, were partly blamed for the credit crunch and banned by the Financial Services Authority.
Income verification, which is usually proved with a payslip for employed borrowers, is now required for all mortgage deals. In theory, self-employed borrowers can still get mortgages but they will need to prove their income with two or three years of accounts to show potential lenders. Anything less than this will severely limit the options, although there are one or two lenders that could look at one year, perhaps coupled with a projection. For example, Kensington can consider only one year of accounts. Leeds BS can accept one year plus a projection where the period of trading does not allow for more accounts to be available and where the mortgage is less than 80 per cent loan-to-value (LTV).
Matt Hall, 34, from Harrogate, set up his own design company after being made redundant in November 2009. He had a lot of expenses in his first year, such as buying a computer and office equipment, but still made a decent profit. Things continued to go well and profit rose in the second year and continues to do so six months into his third year of trading. Mr Hall moved back in with his parents to save money for a flat deposit but, now he’s ready to apply for a mortgage, he’s finding it hard to find a lender who will accept just two years’ accounts and not require a deposit of at least 30 per cent.
‘My first mortgage application to Santander was rejected because my increase in income between Year 1 and 2 of accounts was too much. So I feel I have been punished for setting up a successful business,’ he says. ‘Santander said that I would have known that I was going to buy a property and so would have increased my taxable income in the second year – but really, my income only increased because my business was becoming more successful. I sent three years of bank statements which showed every business transaction I had processed, but this wasn’t enough.’
Mr Hall has now applied to a building society for a mortgage, which he hopes will be more successful. ‘It’s been stressful because the offer I had accepted on a flat was about a month ago now and I had no idea it would be this hard getting a mortgage,’ he says.
Lenders’ criteria can differ, so if you work for yourself, it’s advisable to have your accounts completed by an accountant and then consult a mortgage broker to find out which lenders are likely to look upon your application favourably. If your business has had one bad year in the past two or three, this can make a big difference to the amount you’ll be able to borrow. Any lender is likely to assess your income on your worst year rather than your average or best year, or any future forecast.
Borrowers who have recently left the rat race to set up on their own can find it even trickier to get a mortgage, as lenders generally prefer the self-employed to have been in business for at least two or three years to prove profitability.
The structure of your business can also impact how much you can borrow. Directors of limited companies will often choose to take a small salary and dividends, and retain profits in the company for tax reasons. But this can mean being turned down for a mortgage by high street banks despite being quite capable of repaying the debt.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: 'It makes business sense and is, therefore, common practice for company directors to have retained profits in a limited company, but high-street lenders tend to have an issue with them when deciding how much self-employed customers can borrow.
'The private banks are a much better option for the wealthy borrower as they understand retained profits much better and are often willing to take them into account.’
Meanwhile, sole traders face a different dilemma in that they will be keen to legitimately reduce their tax liabilities wherever possible, but this can then have a knock-on effect on showing enough income to get their required mortgage.