Since the credit crunch, the self-employed have found it trickier to get a mortgage. Self-certification loans, where a borrower did not have to prove their income, disappeared virtually overnight while lenders started insisting on several years of accounts to prove income.
While it makes total sense that borrowers shouldn’t be borrowing more than they can afford and that they should be able to evidence income, some lenders went too far and became too restrictive. The good news is that the situation is starting to ease, with some lenders prepared to be more flexible and take time to understand a self-employed person’s situation.
As far as contractors are concerned, this is an area where we have been big improvements in criteria from two major high-street lenders. If a client has a contract of significant size (£70,000 or more per annum) then the lender will underwrite the income based upon the contract alone, even if the client is technically self-employed. It always helps if the client has a track record of working in that industry but it is a significant step forward nevertheless.
As far as Limited Liability Partnerships are concerned, some lenders will now treat members of LLPs as employed if their shareholding is less than 20 per cent.
With company directors, some lenders will now look at a combination of dividends and salaried income as well as funds from directors’ loans. This is still challenging as accounts are often complicated in structure to mitigate against large tax liabilities.
There are also lenders who are prepared to take into account retained profits in the business.
In terms of how many years you need to have been trading, some lenders will look at only one year’s figures but tend to be less bullish on loan-to-income (LTI) for this and will lend a maximum of four times. Those who are more aggressive on LTI still need need at least two years of trading figures.
Accord will gross up a dividend for affordability purposes which means you could get more than five times ‘perceived’ income for a client. This makes sense in a way; if the lender is prepared to use untaxed money for employed people, why use taxed money for the self-employed?
Rates are already at historic lows so they can’t really come down further, and bear in mind that Swap rates – the rate banks pay to borrow from each other – are rising so it is highly unlikely that they would anyway. The welcome development is that conditions are generally improving for the self-employed so it should be easier to get a loan. Get in touch for more information.