For many years, small business owners and start-up entrepreneurs were able to obtain mortgages for houses and apartments just by informing prospective lenders of their earnings, without having to provide the necessary proof of income. These mortgages were known as self-certification mortgages, also known as self-cert mortgages.
Unsurprisingly, self-cert mortgages have long been popular with self-employed professionals, as well as freelancers and contractors working for themselves. This is because hard-working entrepreneurs did not have to find the time (or money) to commit to adequately preparing their accounts for lenders to scrutinize.
Unfortunately for entrepreneurs, self-certification mortgages were prohibited by the UK’s Financial Conduct Authority (FCA) in 2011 as part of the fallout from the 2008 recession. It was discovered that lenders’ trust had all too often been abused by applicants who were dishonest about their income and were eventually granted mortgages they could ill-afford, certainly after the financial crash.
The other problem is that many advisors would steer sole traders and entrepreneurs to self-cert mortgages, insisting that it was often the best (or only) way to obtain a mortgage when working for yourself. The reality? That could not be further from the truth. In fact, self-employed professionals can access the same products as full-time employed applicants, even if it might require a little more organization on the applicant’s behalf.
Although it’s true that self-cert mortgages are still up for grabs from lenders based overseas, these products are very much frowned upon by the FCA. The main reason being that applicants cannot use the Financial Ombudsman Scheme for greater protection over their mortgage products. Overseas lenders are also prone to adding expensive fees on top of their mortgage products and it can be harder to get in touch with them when you need them.
How to increase your chances of getting a mortgage when working for yourself
First and foremost, it’s important to have a period of trading history to call upon. Most high-street banks and lenders will prefer two years of accounts to support your application and average income. Alternatively, SA302 and Tax Year Overview forms from HM Revenue and Customs (HMRC) should suffice, given that these are official declarations of your annual earnings.
If you only have a year of trading history to hand, it’s not the end of the world, but it does reinforce the need to use the advice of a specialist broker who can point you in the right direction of lenders with a greater risk appetite to borrow to self-employed professionals.
Using a broker is particularly beneficial for self-employed professionals that are first-time buyers. That’s because you’ll have little experience of the mortgage marketplace and, for a small fee, they can expedite the whole process for you, allowing you to focus on doing what you do best and run your business.
The broker fee could even be paid for by the savings on stamp duty land tax, which has currently been scrapped for property transactions in England and Northern Ireland for purchases up to £500,000. According to Trussle’s handy stamp duty calculator guide, stamp duty is paid at 2% of the value of properties priced between £125,0001 – £250,000, 5% of the value of properties priced between £250,001 – £925,000. The holiday, designed to breathe new life into the UK property market, expires on 31st March 2021 and could save you up to £15,000 on your purchase.
Additional tips for self-employed mortgage applicants include getting on the Electoral Roll, ensuring your credit score is at an acceptable level with no outstanding defaults or County Court Judgements (CCJs), and prepare your proof of deposit well in advance to accelerate matters.
Securing a mortgage as a sole trader with fluctuating income needn’t be daunting when you follow the above steps to get the best rate for your dream home.
