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What are my self-employed client’s remortgage options?

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  • 09/09/2003
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My client is recently self-employed and will come to the end of his fixed rate period next month and wants to remortgage. He wants a seven-year fix but would he be wiser to take a short-term fix or discount?

As the client is only recently self employed he may well need to look for a self certification product, on the assumption that he will struggle to prove his income or to produce audited accounts. If a self-certified route is necessary, he may not be able to obtain a high LTV, with 75-85% LTV being a more likely maximum. Very few lenders will accept a self-certified application with less than 12 months’ trading. Kensington would consider self-certification for the newly self-employed, but rates may be higher than the client is anticipating and is used to.

If, however, circumstances are such that self-certification is unnecessary, both the LTV and rate options are far broader and more attractive. For instance, if the self-employment continues a trade or occupation which has been unchanged for many years, such as an employed computer programmer or a journalist simply moving over to freelance status, some lenders will consider the application more favourably by taking into consideration the prior employment.

His track record with the current lender is relevant and he may find it far easier to switch into a new product on offer from the current lender.

The recent move to self-employment suggests that he has no firm idea as to what his outgoings or income is going to be. In these circumstances, the certainty provided by a fixed product is worth its weight in gold. Longer term fixed products tend to carry high redemption penalties which he should try to avoid. A 5.79% fixed until 2010 with Northern Rock is a typical deal, but carries 2% penalty throughout the seven-year fixed period.

He would probably be better off with one of the excellent discounted deals currently available. Co-operative Bank’s two-years discount with an introductory rate of 3.34% takes some beating as it offers free valuation, free legals and no early repayment fees.

The key issue here, of course, is whether there is an expectation of an interest rate rise and, if so, whether the impact on the mortgage repayment will be such that the client’s new cash flow will be able to cope or not.

If the answer is no, that he would prefer not be put in the position of having to find the extra money, then the solution has to be a longer term fixed rate which will then offer the protection needed. But longer-term rates come at a premium, perhaps more than 1%, so an extension of the question is ‘If you think rates will rise and this will negatively affect you, do you think the rise will exceed 1% over the next few years’?

If the answer to the original question is yes, then the client can afford the gamble of benefiting from a lower rate now, but is still able to protect himself for a couple of years at least.

Of course, seven years is a strange term, and bearing in mind his lack of a self-employed track record, the client might not necessarily find that many lenders are willing to offer him the choice.

A secondary issue is the stability of the client’s income in the immediate future and his expectations here. Because it is a new business the drag on cash flow is often slow and hard, a wiser move might be to commit to the longer term even if it costs more at the moment and have the peace of mind of knowing what his commitments are every month.

My recommendation would be to lean towards caution. That way the risk of excessive payment rises is removed.

After all, caution is always the better part of valour.

There are a few considerations here the adviser needs to take into account that could affect the options available to this client in important ways.

First, the length of time he has been self-employed. Depending on how ‘recently’ he has become self-employed he could find very few lenders willing to do the loan, even on a self-certified basis as normally the minimum self-employed term for some lenders is at least 12 months, and most require two years accounts.

The second major restriction is that despite the recent pressures from the Chancellor to offer longer term fixed rates, there are still only six lenders in England who will do seven year fixed rates, and only two of these would consider a self-certification mortgage, which he would almost certainly need in these circumstances. Few lenders have reacted to the Chancellors directives, as the pricing for longer-term deals is more difficult and make the rates look less attractive for borrowers.

Therefore, if the client wants a decent choice of providers and products and assuming he has been self-employed long enough he should consider shorter terms, as long as they do not have overhanging redemption penalties, so he is then free to take other products on expiry.

Due to his recent decision to become self-employed he would also possibly have a greater choice after a couple of years as he may then have the necessary accounts et al to move away from self-certified borrowing.

His final consideration should be to look at deals with flexibility as his income may rise and fall so he may need to overpay when income is good, and underpay during lean times, with the added facility if he could get it of drawdown for leaner times.

The final option is to approach his existing lender who will not have to underwrite him again unless he wants more borrowing, they may offer him a loan purely based on his payment records.


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