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The number of people in the UK who are self-employed is at its highest level for 40 years, according to the Office for National Statistics. Around 4.6m people now work for themselves in this country (15% of the total working population). But while self-employment brings more freedom, it also causes more problems if you want to buy a property. If you’re self-employed it can be harder to get a mortgage as you are less likely to have a regular monthly income than if you were employed. This introduces a level of uncertainty for lenders when assessing the affordability of your loan.
The good news is that the assessment of self-employed mortgage applicants is getting generally more positive. We are not seeing a particular resistance to these applicants at present and the approach of lenders seems to be more helpful than at any point since the credit crisis began in 2008. However, the key to processing such applications smoothly and quickly is having a detailed understanding of the way in which income is defined by each individual lender, which can vary considerably.
For example, some lenders look at salary plus dividends when assessing income of limited companies, whilst others may look at the net profit of the business, which can prove more favourable for an applicant. Certain lenders may be pragmatic in their view of a limited company that is not declaring all the profits that it could afford to, whereas others take a tougher, more simplistic view. For companies that have just one year of trading accounts, one or two lenders are significantly more understanding than others.
Knowledge of this level of minutiae within criteria comes from placing self-employed mortgages on a daily basis and is not generally available to members of the public. Having the support of an independent mortgage adviser with in-depth market knowledge and excellent relationships with lenders will prove to be invaluable to self-employed applicants trying to get to grips with affordability criteria.
Example: limited company with falling third year income
Lenders usually ask to see three years’ accounts in order to assess the ongoing profitability of a business and hence the long term ability of its owner to afford a certain level of mortgage repayments. What if the company’s third year of accounts show falling income? Some lenders might take this to mean that the company has met with new competition or has ‘taken its foot off the gas.’ But perhaps what has happened is that the owner has decided to reinvest profits back into the business. In this situation, a skilled mortgage adviser will look to build a bigger picture to show the lender why this happened and why the applicant’s income will return to previous levels in the future. This is done through the provision of an accountant’s projection; once this has been presented, certain lenders may be willing to take a more positive view of the situation.
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