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Self importance

Paul Thomas looks at the options for self-employed borrowers following the MMR

The FSA’s mortgage market review is likely to spell the end of self-certification mortgages, with self-employed borrowers facing tougher requirements when applying for a mortgage.

Traditionally, self-cert loans were a convenient way for borrowers who did not have a regular income or could not prove their income. Now, lenders’ requirements are making it difficult for people who are newly self-employed to get a mortgage.

The majority of lenders require self-employed borrowers to provide two or three years’ accounts to prove their income.

However, Kensington Mortgages will consider self-employed borrowers who have one year’s accounts that have been verified by an accountant or registered book keeper.

Nationwide and Platform also say they are looking at developing mortgage products for self-employed borrowers.

Data from the Office for National Statistics says there are 3.9 million self-employed – nearly 13.5 per cent of the workforce.

A Kensington Mortgages spokesman says it is possible to lend responsibly to someone with only 12 months’ accounts history.

He says: “We have found, as a lender that has traditionally been active among self-employed customers, that we have got the business information that tells us we can make appropriate lending decisions based on 12 months’ trading history, as opposed to requiring 24 or 36 months.”

He adds it is still possible for self-employed borrowers to get a mortgage without selfcert and urges lenders to recognise their importance to the market.

He says: “Self-employed borrowers do not need to rely on self-cert to get a mortgage, although lenders do need to be conscious of the different attributes that a self-employed customer has, as opposed to someone who is able to hand in a pay slip and a P60.

“I think it is important that lenders are aware of the growing significance of self-employed people within our economy and for those people having access to a mortgage is just as important as for employed borrowers.”

John Charcol senior technical manager Ray Boulger agrees there is a place for a more lenient approach to this type of lending but says this will come at a price for the customer.

He says: “Over time and as lenders develop new systems, I think it is likely we will have some lenders that would be prepared to offer a self-employed person a mortgage with a relatively limited amount of information.

“But what is going to happen is that those who can only provide a limited amount of information will have to pay more.”

The Mortgage Practitioner principal Danny Lovey agrees that lenders will price for risk.

He says: “It think it would be good to see more lenders having a more flexible approach to people’s accounts. Lenders will assess risk. If they believe accepting one year’s accounts means they have to charge a higher rate, then it is understandable because they are taking a bit more risk than they would be if they wanted three years’ accounts.

“Pricing for risk is one thing but not being able to get a mortgage full stop is another thing all together.”

But Simplicity Financial Services principal Rob Downham says it might not be sensible for lenders to lend to newly self-employed people until their business venture is established.

He says: “Realistically, I am not sure lenders should lend to newly self-employed borrowers. When you are newly self-employed, it probably pays to be more flexible and renting is probably a better idea because you never know where a business is going to take you.

“If you are young and newly self-employed and the mortgage market does not have a product for you, then wait a few years until your business is settled before you buy – that makes sense.”



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. @ Paul Thomas

    I would love you to follow up this article with an insight into:

    – The difficulties (or not) in getting a mortgage if you are indeed an employee – but – an employee of someone who is self-employed and who has the difficulties you describe above, eg., less than 12 months accounts.

    – Whether any lender recalls (or calls into question in any way) a mortgage granted to an employee who a few months after the mortgage is granted goes self employed.

  2. Dermot Brannigan 27th August 2010 at 3:31 pm

    Lenders will lend to employed based on their gross income, before working out what they’ve spent that on. For self-employed, they work on figures after everything has been spent. We’re back to the 90’s, when lenders couldn’t rely on sophisticated data systems that could predict the likelihood of the mortgage payment being met.

    I agree with Rob Downham, it is ludicrous for lenders to consider lending to any new business, unless it has been established for at least 2 years. The statistics have not been getting better over the years, there are still a large number of business that don’t make their first anniversary.

    I fail to see what is wrong with pricing the risk. Evidence will prove that people running their own business are less likely to borrow more than they can afford for their main residence. They have more to lose. It’s not as easy for someone running their own business to just go and get another job, there’s a lot more to give up.

    Good article, Paul, however it only really considered the options for newly self-employed, rather than the self-employed in general

  3. Can someone please let me know what the situation is for contractors – i.e. someone who has set up a limited company, yet has a guaranteed contract of at least 12 months? Do the same rules apply? My partner has recently moved from a salaried to a contract position in the oil and gas industry, a relatively common venture in the industry, and obviously not as risky as a new start business with no guaranteed/regular income.

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