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Mortgage? Computer says no
It can seem almost impossible to secure a mortgage if you don’t have an employer’s payslip, says Ruth Jackson.
(Image credit: This content is subject to copyright.)
A decade ago, being self-employed was no barrier to getting a mortgage. Some lenders didn't even bother asking borrowers for evidence of their earnings before handing over hundreds of thousands of pounds to buy a house (the now-extinct "self-certified" mortgage). But then the 2008 financial crisis and housing crash came along. Amid the subsequent crackdown on mortgage lending, it can seem almost impossible to secure a mortgage if you don't have an employer's payslip to wave at the lender.
"Rather than we say yes', the common response from many lenders to enquiries for the self-employed is: the computer says no'," says Jeff Prestridge in the Daily Mail. "The mechanistic way many big lenders now process mortgage applications means that those made by the self-employed are routinely spat out."
So, how can you improve your chances of home loan approval? Firstly, pick your lender wisely. Some are more amenable to self-employed applicants than others. Paragon, a lender that specialises in buy-to-let mortgages, has just moved into the residential market with a mortgage designed for the self-employed, retirees, or people with multiple income streams. The launch has been "well received by brokers, who are hopeful its complex mortgages could help plug a big finance gap for borrowers who don't fit the normal employment mould", says Sarah Davidson on ThisIsMoney.co.uk.
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Secondly, get to understand lender's requirements so that you can make sure your application fits the bill. Some lenders, such as Aldermore and Kent Reliance, only need to see one year's accounts, but others may require up to three year's accounts, and will average your income over those years when deciding how much to lend. It's also worth looking at the "challenger" banks they may be more inclined to be flexible than the mainstream lenders, who can pick and choose their customers.
Other things that can help include using an accountant to file your tax return some lenders prefer accounts that have been certified by a professional. Also, get hold of your credit record and make sure it contains no errors. Finally, speak to a mortgage broker. They know the market inside out, so can match your circumstances to the best lender for your situation, saving you a lot of legwork.
The lenders to consider
If you are self-employed, finding a mortgage will take more than simply tapping your details into a comparison tool and opting for the cheapest deal. Here are some lenders to consider.
Paragon: this buy-to-let specialist's underwriters look at every application individually, so there are no "computer says no" blanket rejections here. "Customers with complex incomes deserve access to a wider choice of mortgage products," says John Heron, managing director of Paragon. "From our experience in the buy-to-let market, we know that customers with multiple sources of income are often among the most credit-worthy and we see an opportunity to leverage this experience and bring new choice and competition to the owner-occupied market." Rates start from 3.29% for a two-year deal.
The Mortgage Lender: this challenger bank offers mortgages to the self-employed and those on contract work. Rates start from 3.41% for a two-year fixed-rate deal on up to 85% loan to value.
Aldermore, Kensington, Kent Reliance and Precise: these banks all accept applications from self-employed workers with only one year's accounts.
Virgin Money: one of the few high-street lenders known for lending to self-employed home owners. Rates start from 1.44% fixed for two years.
Mortgage brokers: if you want help finding the best lender and lowest interest rate for your circumstances, then use a mortgage broker. London & Country and CMG Advisers each offer a nationwide service and can help you to ensure your paperwork meets your lender's requirements.
In the news this week
From April, tax breaks for "social investment" will become five times more generous, in an effort to boost funding for projects "that can generate more than just a financial return", says Vanessa Houlder in the Financial Times. The current three-year rolling limit for government-subsidised investments of €344,000 is being put up to £1.5m. Social Investment Tax Relief (SITR) is 30% of the value of a qualifying investment.So a £10,000 loan to a social enterprise means a £3,000 reduction in an investor's income tax bill for that year, as well as a potential capital-gains tax deferral.
The benefit for the social enterprise is a lower cost of borrowing, and they only have to start repaying the principal after three years. Projects funded so far have included saving a village pub, but the most typical areas for investment are employment, training and education. Although "impact investing" is increasingly popular, SITR has had a slow start since its launch in 2014, with just £3.4m invested across 30 organisations.
Prudential, the UK's biggest insurer, has pulled out of the UK annuity market entirely, a landmark event in the history of this erstwhile "mainstay of retirement income", say Oliver Ralph and Josephine Cumbo in the FT. Annuities provide millions of savers with a stable income for life, but pension rule changes in 2015 mean that retirees no longer have to buy one, while loSet featured imagew interest rates have rendered annuity rates "unattractive". Prudential pulled out of bulk annuities last March, and from the open market last summer. It is now withdrawing altogether by ending sales of annuities to clients on its own platform.
Anyone looking to improve upon the paltry interest rates available from current accounts on offer from high-street banks should head down to Tesco, says Rupert Jones in The Guardian. Tesco Bank is now paying 3% on balances of up to £3,000. Unlike many bank accounts with favourable interest rates, customers aren't obliged to pay in a minimum amount every month or to set up direct debits, and individuals are even allowed to open two accounts each. Doing so, and putting £3,000 in each account, would provide £180 interest in one year.
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Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.
