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Credit where it&#39s due

Traditional mortgage lenders seem slow on the uptake when it comes to

recognising the last days of the traditional worker.

A great number of people no longer have a job for life. Five million

people in the UK are self-employed or on short-term contracts.

Most traditional lenders continue to be governed by a rigid credit-rating

system which disqualifies borrowers if they do not have three years of

accounts. This point alone can lead to a great number of self-employed

workers being turned away at the first hurdle.

High-street lenders rely on rigid computer systems to assess potential

customers, with up to one in four finding, for one reason or another, they

are not welcome.

A recent report by Datamonitor has found more than eight million people in

the UK, or one in five adults, are on credit black lists, unable to take

out hire-purchase agreements.

This so-called credit underclass has sprung up following the use of

automated ratings to assess if a person is worthy of receiving credit and

the dependence of banks onthese rather than a manager&#39s judgement when

deciding on a loan. The report also found 23 per cent of people between 18

and 65 have had applications for credit from banks and building societies


But there seems to be light at the end of the tunnel, with signs of

lenders relaxing their general attitude.

Having three years of accounts may be more difficult for the self-employed

for a number of reasons, including the company only just having started up

or that their earnings may not accurately reflect their true financial

position due to reinvestment into the company.

It may though be getting easier for the self-employed to obtain a mortgage

and a relaxing of high street lenders&#39 attitudes has become noticeable in

the last few years.

However, the alternative lenders are probably still regarded as the most

sympathetic to the self-employed – but with a general rule – capital. A

self-employed potential borrower needs to demonstrate a big deposit is

going to be put on the property. Generally, 10 per cent and upwards is


If a borrower has a reasonable credit history they should not have too

many problems. The overall relaxing in attitudes has come about as most

lenders with short memories are again chasing business, coupled with an

increase in demand from the self-employed for mortgages which has forced

their hands.

One example of how lenders such as the Nationwide and the Royal Bank of

Scot-land have relaxed their attitudes can be found in the extended income

multiples now available.

Legal & General is one of around 20 providers offeringa product designed

for theself-employed.

Bank of Scotland offers a special status mortgage without requiring an

income figure but your accountant must confirm how long your business has

been trading and that it is still going. The bank can lend up to 80 per

cent LTV with a maximum of £300,000. Borrowers able to produce

accounts could borrow up to 100 per cent on a property. But the bank would

take the borrower&#39s income as being the net profit on the accounts, rather

than some higher figure.

Additionally, it is not uncommon now to find lenders offering up to five

times salaries compared with two to three times not so long ago.

Many traditional lenders have also slowly begun embracing the concept of

availability rather than income.

Issues such as whether an applicant has children is becoming increasingly

used asa means of testing afford-ability, as well as checking bank

statements for proof of remuneration.

The type of career you are in is also a big factor. If you are a

self-employed market trader after being an employee of an accountancy firm,

it is likely you will have more problems than if you left the same firm and

decided to set up a one-person practice, as it is easier to demonstrate

potential earnings and gain lenders confidence.

Non-conforming lenders are also more likely to offer products to the

self-employed. For example, traditional lenders are not likely to offer

mortgages over £200,000 to the self-employed even if they have a lot

of equity, whereas specialists will offer bigger loans.

Council of Mortgage Lend-ers spokesman Bernard Clarke says traditional

lenders lookat the uncertainty of future income against the amount of money

a person wants toborrow in relation to income and the cost of the house.

Non-conforming mortgage lenders are willing to accept customers in many

cases classed as too risky despite coming under criticism in the past for

interest rate rises for those who fall behind with repayments and

redemption penalties for those who pay off their mortgage early.

One of the reasons they can offer finance is because credit risk is

assessed on a case-by-case basis by an underwriter. But rates are likely to

reflect the higher assumed risk, at least for a few years.

However a series of checks by the OFT, after sustained pressure from the

media, has meant a lot of malpractice has been tidied up. But borrowers

should always double-check the small print on a loan.

Many non-status lenders have become members of the CML to add to peace of mind.

One analyst suggests a solution. Borrowers should opt for a

self-certification loan, offered by subsidiaries of one of the newer

lenders. With these you certify what your income is but do not have to

prove it. The downside is this will cost you a higher interest rate,and you

may not be able to borrow as big a proportion of the property value as you

would witha conventional loan.

Other brokers say the key for the self-employed is whether they can prove

their income. If so, they can get the same deal as an employed person on a

status basis.

Most lenders still insist on seeing audited accounts. Generally, the lower

the total amount loaned, the less rigorous the demands.


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