Since the Mortgage Market Review was introduced last year it has been harder for everyone to get a mortgage. But if you are self-employed, you are likely to find it even trickier than you would if you were employed.
In theory, you should be able to get a mortgage as long as you can prove that you can afford it. However, the reality is that the self-employed are discriminated against as banks would rather lend to an employed applicant with a lower salary than someone who has started their own business. The latter is still viewed as being riskier than a paid position.
Lenders tend to take an average of the last three years of accounts but if the most recent year’s income is lower than the previous two years, the bank may use that and not necessarily take an average. The problem as the lender sees it is that if you have a consistent two-year history and then the most recent year’s income dips, it might be indicative of an issue with the business or the market specific to that business. Lenders will always look for an upward trend to demonstrate the sustainability of income.
In this type of situation, a full explanation of why the figures have dipped would help and if there is a good reason, a lender may be willing to take a positive view. For example, it might be a single bad debt or that fees were delayed by a month or so and are due imminently, thus bolstering next year`s figures.
A drop in income might also be a result of a tax strategy. Lenders are not very appreciative of tax strategies and are more formulaic since the arrival of MMR. There is a big disconnect between accountants who are there to declare as little income as possible to avoid tax and lenders who want to see as much as possible. If you are self-employed it is worth bearing this in mind and ensuring decent income is declared.
On the plus side, if income has been steadily increasing over the past three years, the bank may not take an average but just the most recent year, which is higher. Some of the challenger banks may consider one year’s accounts but the rate may be more expensive.
If you are self-employed and need a mortgage, it is vital that you speak to an independent mortgage broker, such as Anderson Harris, as it can get quite complicated.