Self Employed Mortgage UK

Introduction - This article provides an overview of the principles and issues to consider when choosing a uk self employed mortgage.  In particular, it reviews the historical development of the business mortgage, self certification home loan mortgage, or 'non status' cert mortgage lending.   These products have been designed by lenders to help finance contractors, freelancers, company directors, self employed, seasonal workers, or people with a poor credit history report. This article also provides useful links to commercial and regulatory bodies, so you can seek professional qualified help from a self employed mortgage adviser, as well as compare mortgage interest rates and product information in greater detail.  The following short article is not comprehensive and does not purport to finance advice or legal advice, relating to particular circumstances.

What is a Mortgage? - in principle, a mortgage is a legal instrument between a mortgage lender and a borrower. It provides a charge over the borrower's property.  The property may be repossessed if the borrower fails to keep up the payments associated with the terms of the loan.  In the United Kingdom, the mortgage market is mature and has developed a huge range of variations of mortgages to attract different interest groups and to cater for different situations.   For instance, there are products designed with different types of mortgage interest rates including fixed, variable, tracker, discounted and capped rates. Traditionally, the 'capital repayment' mortgaged provided the most common and simple way to ensure that at the end of the mortgage term, (assuming all monthly repayments were made), the capital outstanding balance reduced down to zero. However, as property prices and stock markets rocketed during the 1990's, the 'interest only' mortgage was developed, to assist private landlord investor and first time buyers, (struggling to get on the housing ladder). Mortgage products were also marketed towards different interest groups such as residential home owners, first time buyers, self-employed small business people, property developers and commercial landlords....

Self Employed Mortgages - during the 1980s and 1990s, there was a huge growth in the number of small business start-ups.  They chose to leave full-time employment to control their own destiny and follow their dream. However, many of these people then found it difficult to obtain a mortgage, because of their new employment status.  This is because self employed people do not always have a regular salary and therefore cannot provide a consistent number of payslips or even a P60 to prove their personal income to lenders.  Lenders have traditionally viewed this group of people with suspicion and charged high interest rates and higher deposits, to offset the risk of uncertainty in the borrower's potential ability to repay a mortgage. 

The entrepreneurial enterprise culture of the 1990's, created an opportunity for mortgage lenders to create a new product segment called 'self certification mortgages'.  Self certification means some of the income checks are not undertaken by the lender.  A credit referencing check would still normally be undertaken on the mortgage applicant. In simple terms, the mortgage applicant declares their own earnings on the application.  However, problems began to arise throughout the 1990s as applicants 'over estimated' their income, in order to obtain a higher income multiple and loan to value.  

These self employed (self cert) mortgage products were, (and are still today), developed for self employed people, who could not easily meet the traditional mortgage lending criteria, set out in most mortgage application procedures.  Prior to the credit crunch, this provided the opportunity for self-employed businesspeople to raise mortgage funds to their full earnings potential.  Traditional lenders have been rejecting mortgage applications due to lack of information or uncertainty.   By opting for a self-employed mortgage, the chances of being turned down have been reduced.  These specialist mortgage lenders are being more flexible and recognize that the income of self-employed people varies from year to year.  Therefore, an assessment of average income is used as a general guide by the lender.

In 2007, The Credit Crunch Bites - since the credit crunch, lenders have withdrawn a huge number of mortgage products to restrict the flow of credit (in fear of defaulting borrowers and further cash flow problems throughout the financial system). Lenders are paying close attention to applicant's credit history and demanding more and more personal information to validate an application. In particular, lenders will want to see tax returns for the previous two years, bank account statements, audited accounts of the past three years, memorandum and articles of association, details of all creditors names and contact information, proof of address, details of any other outgoings. In short, lenders are trying to assess individuals in a less automated and 'one size fits all' approach, instead evaluating the individual's ability to repay the mortgage.

Using a Mortgage Broker -  by using a qualified FSA approved, mortgage broker who has access to 'whole of market', the opportunity exists to quickly identify competitive rates and terms for self employed mortgages.  The mortgage broker remains a good starting point as a means of accessing competitive rates and a broad choice of options. It is probable that you will have to pay the broker an 'arrangement fee' for their advice and expertise and access product rates, (not always available on the high street).

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