Around 14% of the UK’s working population are now self-employed, compared to just 8% in the early 1980s, according to the Office of National Statistics, and it is indisputable that this group has specific financial circumstances that often need special consideration. However, there is still a misconception that just because someone is self-employed they automatically need a special type of mortgage.
A significant number of clients who ask their adviser for a self-certified or non-status mortgage would qualify for a status mortgage and a good adviser can save their client a considerable sum by knowing which status lenders to approach. Whether or not a self-employed person will need to opt for a self-certified mortgage will principally depend on whether they can satisfy the lender’s criteria in the same way that an employed person would. This would usually involve producing evidence of income from two or three years’ audited accounts, an accountant’s certificate confirming income or, if the mortgage-seeker does not have an accountant, agreed tax assessments.
The issue for many self-employed people is that status mortgages usually restrict their borrowing potential because they are normally based on the amount they declare as taxable income. They may earn a fairly sizeable fee income, but a good accountant will often be able to legitimately make a good dent in this before arriving at their taxable income. The self-certification or non-status mortgage can, of course, avoid this dilemma.
Most self-cert lenders used to expect the self-employed borr- ower to have an accountant, partly because they would contact the accountant to verify they could afford the mortgage. However, this is less of an issue today as more lenders do true self-certification. To make an appropriate recommendation it is clearly necessary not only for the adviser to have a good knowledge of different lenders’ criteria, but also to know the areas within their criteria on which they may exercise some flexibility, for example, by exceeding the stated maximum loan to value.
One example of mortgage applicants frequently targeted by lenders and brokers promoting self-cert mortgages are contract workers.
However, borrowers in this category can often qualify for a normal status mortgage as typically, providing the borr-ower has been contracting for at least one year, or has a long term contract, an enlightened lender will underwrite the application using the current contract as the basis for establishing income.
Nevertheless, there is plenty of choice in the self-cert market. With more lenders becoming involved in self-cert deals the traditional self-cert lenders are seeing an erosion of their lower LTV business and are responding by improving some aspects of their criteria, such as national loan sizes.
Ray Boulger is senior technical manager at Charcol