Best Lenders for Self-Employed Mortgages
Finding the right lender for your mortgage can be a difficult task, even for those who are not self-employed. Trying to know which to choose from the range of high street mainstream lenders like banks and building societies, to smaller specialist lending companies can be a confusing experience–each will have their own mortgage products, lending criteria and methods to assess applicants.
Contractors, freelancers and other types of self-employed people can find the search even more challenging. Lenders’ approaches to assessing self-employed income can vary from place to place, with some being more ‘self-employed friendly’ than others.
Finding you the best Self-Employed Mortgage Lenders
Without a string of employer’s payslips to verify a regular income, self-employed people have always had a tougher time of getting a mortgage than others, and especially difficult with most of the mainstream banks and building societies. Many lenders don’t have the knowledge, systems or sometimes inclination to properly assess a self-employed person’s income with regard to mortgage affordability, and may have criteria that doesn’t recognise self-employed income’s natural irregularity. This was made even worse in 2008 with the financial crash and ensuing credit crunch, and many self-employed people were effectively left stranded in the housing market.
However, in more recent years, this has started to change. The most major influencing factor is the shifting nature of the UK workforce, with more people than ever before adopting a self-employed approach to their career, or on fixed-term or zero-hour contracts. The bigger hitters on the mainstream mortgage market have realised that creating too many barriers for self-employed people could affect their market share in the future, and so have become more flexible in their lending criteria when it comes to self-employed mortgage applicants.
Also, in reaction to the mainstream lenders’ hesitancy to lend to the self-employed, a thriving market in smaller, more specialist mortgage lenders have sprung up to fill the gap in the market and offer mortgage services to self-employed people, recognising that their liabilities are often no different than others. These lenders are usually more flexible in assessing and verifying your self-employed income, for example sometimes asking for just one year’s accounts instead of the traditional three, or taking into account assets other than your raw income figure.
In recent years, we have all noticed the dramatic ups and downs of the lending market and the shifting barriers of entry, especially for people who are self-employed. Before the financial crisis and ensuing credit crunch during 2008–9, it was common for lenders to offer 100% mortgages, and in some cases even more than 100%. But after the market crash caused by the subprime mortgage market in the USA–and the knock-on effects in the financial world–100% mortgages disappeared from the market, and lenders became far more cautious about who they lent to, and the conditions of any loan, in order to minimise their exposure to risk.
However, it’s not all bad news. The market has had a few years to bounce back, and we have seen a gradual move to more flexibility and openness in the mortgage lending market. Although not back to the heady lending days of old, it is now much easier to get a mortgage with a 90% loan-to-value (LTV), and the Government’s Help to Buy: Equity Loan scheme has made 95% mortgages possible for homebuyers who need them most.
This said, the nature of the mortgage market means there is pressure for borrowers to supply as large a deposit as possible, but there are also benefits for doing so. You’ll usually need a deposit of at least 5%–10% of the mortgaged property’s value, but the average deposit in the UK is around 20%–which will get you more favourable terms on the loan.
You might find that in addition to variances in lending criteria between mortgage lenders, they also vary their terms according to the type of customer, and in particular those that they perceive as being a higher risk. Rightly or wrongly, this can include contractors, freelancers and other self-employed people. A lender’s approach is usually influenced by their previous experience with a particular sector, meaning that there is no blanket rule for the LTV (e.g. 90% or 95%) that a mortgage lender will offer all applicants.
Your credit score can also affect the LTV you are offered. If you have a chequered credit history, depending on the nature of any negative credit events, mortgage lenders will generally ask for a higher deposit, and possibly also state a slightly higher interest rate. In limiting the value of the loan against the property, they are ensuring they take the least possible risk, with least exposure in the case of a default. With higher interest, they are also ensuring they start to see their money coming back to them at a quicker rate. Some lenders might also place a limit on the total mortgage size, especially for loans with a higher LTV–for example a maximum lending limit of £500,000 on a mortgage with 90% LTV.
Aside from fulfilling mortgage lenders’ criteria, there are other good reasons and advantages for providing as large a deposit as possible. Generally, the larger the deposit you provide, the better the mortgage deals you’ll be able to apply for–most lenders have a range of slightly different mortgage products available, usually grouped into bands or tiers depending on the level of deposit and LTV, and the higher the deposit, then the lower the interest rate. Here are some examples of the types of bands and interest rates you might see on a freelance or contractor mortgage (although new products and policies may have come into place since the time of writing, for better or worse!):
- 4.4% 5-year fixed rate for lending up to 75% LTV
- 5.4% 5-year fixed rate for lending up to 80% LTV
- 8.4% 5-year fixed rate for lending up to 85% LTV
- 5.4% 5-year fixed rate for lending up to 90% LTV
You might find that increasing your deposit amount (if possible) by just a few thousand pounds could bring you into a more favourable band with the particular lenders who can supply the kind of self-employed mortgage you need, so it can pay to think strategically about the level of your deposit and consider the benefits of possible lower interest rates for at least the first 5 years of your mortgage.
Want to know more about how you can get a self-employed mortgage as a contractor or freelancer? Get in touch with our team for a no-obligation discussion about your situation.
