Not all mortgage deals punish the self-employed

Recent figures suggesting that self-employed workers face the toughest mortgage conditions in a generation need not apply to the UK’s contractor community, writes Tony Harris of specialist IFAs ContractorMoney.

‘Perfect storm’

Record self-employment has unfortunately coincided with strict new mortgage affordability criteria that mean many micro-business owners now face an uphill struggle to secure the borrowing they need.

While the Office for National Statistics calculates that the number of people working for themselves has jumped by almost one million since 2006, figures from the Council of Mortgage Lenders show that the number of mortgages secured by the self-employed has fallen by 72 per cent over the same period.

Self-Cert’s demise

This fall is at least in part due to the fact that before the credit crunch nearly one in four mortgages was granted on a so-called self-certification basis, where the borrower did not have to prove their earnings. The Financial Services Authority has effectively banned these schemes in an effort to foster what they consider to be more prudent lending. The regulator has applied pressure on mortgage companies to stop the practice even though many lenders actual experience shows that they are no less likely to suffer default on a self-cert mortgage than on a more mainstream loan.

The effect of a ban on self certification has been compounded by a general tightening of mainstream lending criteria as institutions have reacted to a general shortage of funds, restricting borrowing to only the very strongest of applicant.

By resorting to the traditional income measure of using the average of three years’ accounts, at the very least, this has delayed plans for many freelancers or directors of smaller enterprises who would otherwise be eager to buy their first or next home, or remortgage at the end of an initially good interest rate.

Rather than concentrate on running their business as efficiently as possible, which the economy desperately wants, micro-business owners have increasingly needed to bear in mind the demands of mortgage lenders. Start-up costs, fluctuating trading conditions and perfectly legitimate tax planning can all significantly reduce a specific years accounts figures and dramatically reduce the overall mortgage that can be granted. With an increasingly pedantic attitude taken by mortgage underwriters, any inconvenient details that don’t fit nicely into a computer-based model can spell disaster for any would-be borrower.  

But contractors have a lifeline

Luckily, for those working on a short term contract, there are still a small band of freelancer-friendly lenders who will look on your earnings in a more sympathetic light.

Throughout the credit crunch we’ve been working hard to keep these mortgage institutions onside and so unlike other self-employed workers and SME directors, contractors can base mortgage affordability on a multiple of their gross contract rate alone. Typically a multiple of 3.5 to 4 times is applied to the annualised total of your current contract rate and with access to exactly same high street interest rates as a ‘permie’, contractors shouldn’t be penalised in any way for the way they work.

Freelance-friendly lenders, not staff

Sadly though, the branch staff at these freelancer-friendly lenders are not always familiar with applying the head office-agreed underwriting criteria, but the use of a specialist mortgage broker will open up these schemes for you. At what can already be a very expensive time, you also shouldn’t have to pay the £500+ that some brokers levy as their fee either. You should be able to still find an adviser that relies solely on any introducer’s commission from the lender rather than one that charges you a fee in additional to the amount they receive from the lender.

Against all the odds some lenders are even beginning to offer exclusive interest rates for contractors again and so it seems that, in a small corner of the mortgage market at least, the outlook is looking relatively bright.

Wednesday 19th September 2012