Kevin Gibson from Ascot Mortgages looks at saving for your deposit and finding the perfect lender for your mortgage. Here’s Kevin’s top tips for entrepreneurs on securing your first residential mortgage.
Don’t panic. It is possible to get a mortgage when you’re self employed
Despite what people say, you have the same chance of securing a mortgage if you are self-employed as if you are employed. The only difference is in how you need to prove your income.
Instead of gathering together wage slips and a contract, entrepreneurs have two choices. Your annual accounts will stand as proof of income, as long as they are certified by an accountant. The second option is an SA302 form from the Inland Revenue. An SA302 is the IR’s response to your tax return. It is not usually sent out to you unless you request it, but can be provided within 24 hours if you state it is for mortgage purposes. It’s worth making the phone call as the SA302 is preferred by most lenders.
Start stumping up your deposit
How favourably a lender views you is based upon which of the following percentages of deposit you can reach: 10 percent, 15%, 20%, 25 percent or 40% and above. The size of your deposit affects you in two ways. The higher your deposit, the better interest rate you will be offered. Conversely, the higher deposit you have, the lower credit score you will need to achieve. So, for example, if you can only scrape together 10% of the asking price upfront, your credit rating will need to be squeaky clean. But if you have a 40% deposit, mortgage lenders will be easier to appease about a less than perfect credit history.
Forget about self-cert. It’s gone
Until 2011, self-certification mortgages, or “liar loans”, were a loop hole that allowed mortgage-borrowing without proof of income. Initially created to make the application process more straightforward for the self-employed, major abuse ensued by borrowers looking to maximise their loans, often beyond their ability to pay. The figures show the scale of the exploitation: only 13 percent of UK workers were self-employed between 2008 and 2010, but over 50% of mortgages granted were self-certification.
A few mortgage lenders do still “fast track” low-risk borrowers, who have a large deposit plus excellent credit rating. Fast track means that they may not ask for proof-of-income.
Don’t start approaching multiple lenders
You will be credit-checked every time you approach a mortgage lender. And this is recorded on your credit file. Once mortgage lenders start noticing constant credit searches, they may become more wary about offering you a loan. So don’t be tempted to dip a toe in the water until you are serious about taking out a mortgage. A whole-of-market mortgage broker is a useful ally for the self-employed, as they can assess your circumstances and advise you on which lender is most likely to approve your application first time.
“Three years” books’ is a myth
There’s an off-putting and often repeated myth that you need three years’ accounts to get a mortgage. Well slice a year off that. It is typical for an applicant to be asked to present two years’ evidence of self-employed income. In some circumstances, it can even be possible to get a mortgage with just one. But be aware that lenders vary in the criteria they use to measure your income. Some may ask to see net profit only, whilst others could request evidence of salary plus dividends or salary plus net profit.
Consider smaller lenders
There are a number of small building societies who will look at applications on a case-by-case basis. This works to the advantage of entrepreneurs, who can quickly find themselves rejected by the one-size-fits-all approach of many high street lenders. The best way to access smaller lenders is through a whole-of-market mortgage broker. And despite what you might think, some of the smaller lenders may be offering the best value mortgages. Competitive, lesser-known lenders include Precise, Kensington and Buckinghamshire Building Society. You could also look into companies such as Simply Adverse who will help people with bad credit get a mortgage.
By Kevin Gibson from whole of market broker Ascot Mortgages