Mortgage for self-employed person

[chuteless]

I've just started looking into buying myself a home (currently living with parents), and went to see a mortgage adviser today, to see how much i could borrow and what the options are.

One thing that she said (and I could have this wrong - there was a lot of information to take in, considering I've never looked into this before), was that because I am self-employed, the interest rate on the mortgage will be higher? Can anyone confirm if this is right? I'm going back later this week for some viewings, so will ask her again, but would just be interested to know if anyone else has heard of this? I can understand that I may be considered a 'higher risk' because I'm self employed, in which case requiring perhaps a larger deposit would make sense, but I don't see why there would be a higher interest rate, and how this would provide the lender with any more 'protection'? If anything, I would imagine it would make me an even higher risk, because I now have to pay more.

I'm hoping I just misunderstood what she said, but any opinions/tales of experience would be nice!

[bollecks]

It depends entirely upon your position.

Self employed is a factor taken into consideration, but there's a huge gamut of risk that covers self employment.

For instance, if you're a gardener and you've only been running your business for a few years, and your work is seasonal you're going to have problems.

If you're a GP or a Self Employed dentist, accountant or whatever with stable income you're probably a lower risk than an employed person who's only been in their job for a year or two, and underwriters take all this into account.

I'm self employed (writer) I've just organised a mortgage with Barclays. As I'm a high earner, only borrowing 30% of the house price and and could provide four years tax returns showing my income the mortgage was fast tracked and the offer was with my solicitor within a week.

If your income is less stable and you can't prove it, or you have a deposit of less than 25% you may have to pay a higher rate.

[chuteless]

Thanks - I can appreciate I may be a higher risk borrower (although I do have the 25% deposit and three years accounts), but I just didn't expect that to mean the interest rate would be higher than for an employed person.

It's the same as walking into a shop and having to pay more for something just because I'm self-employed. Requiring a bigger deposit would give the lender more security, whereas a higher interest rate just makes them more money - I can't see how it benefits them other than financially?

[Remains]

The problem could well be with the times we are living in.

I took out a mortgage about 3 or 4 years ago now, as a self employed and only about 6 months worth of account showing the income that I wanted to borrow against, and a few years before that on a lower income. My accountant wrote a letter to the mortgage lenders basically saying that he knew my business and could forsee no reason why my income would ever decrease or cease.

I had about 13% deposit and a fixed rate equivalent to what was being offered for 'regular' borrowers.

However, things have changed significantly since the recession, especially for self-employed people and it's much harder to get a decent mortgage these days.

Shop around and see if an independent mortgage broker can help you as they might save the legwork of finding out which lenders won't even touch self-employed. And if you have an accountant ask whether they would be willing to vouch for you - it doesn't make any legal or financial difference but can lend a little 'circumstancial' weight to your application.

EDIT: The reason they will be wanting a higher percentage is because you are seen as a bigger risk to them. So over the course of the mortgage, say 25 years, you continue to be a higher risk that you will default, so they want more money from you. Of course in these times, many self employed people are in a more secure position than employed people!

[bollecks]

Thanks - I can appreciate I may be a higher risk borrower (although I do have the 25% deposit and three years accounts), but I just didn't expect that to mean the interest rate would be higher than for an employed person.

It's the same as walking into a shop and having to pay more for something just because I'm self-employed. Requiring a bigger deposit would give the lender more security, whereas a higher interest rate just makes them more money - I can't see how it benefits them other than financially?

Actually this is exactly how credit works. The amount of interest is a reflection of the degree of risk involved.

You pay higher interest on a car loan than a home loan because a car is a riskier asset. Marks and Spencer can get a lower interest loan than Fred's Newsagent and the Japanese government can borrow money at virtually zero interest, whereas the North Koreans have to pay 28%

If you think about it, the only other way to account for risk would be to charge an enormous upfront fee to high risk borrowers, and I expect that would be even less popular!

[evilsly]

the problem is the previous system was heavily abused.

there is an agency temp in my office, who bought a house in 2007 on a 97% self cert mortgage with one of the well known sharkish lenders, and is currently having to work 2 jobs just to meet the mortgage payments.


lie to buy was absolutely rampant during the 2005-2007 boom

[chuteless]

Thanks for the replies - I guess it all makes sense when you look at it like that.

Looks like I need to be saving for a little longer anyway, so I'll worry about it again sometime next year!

[karen hudson]

To apply for a mortgage as a self employed person, you should present your finances in a tidy way.

Get your bank statements together. Demonstrate any pension payments and past mortgage payments.

Do your preparation carefully because if you are turned down the next lender you apply to will see this and may turn you down automatically.

If you keep getting turned down it will go on file at the credit reference agencies and look even worse to the next lender - regardless of the exact reasonm you were turned dow before. So work on remedying why you were failed before approaching other lenders.

You may find it's best to go through a mortgage broker. They will know which lenders will consider you and should have access to special deals. You may be surprised to find you're offered a normal interest rate and terms.

You can link you with a broker who specialises in helping the self employed from here. We're confident that they're good but do shop around and go with the best quote you get.