Newly self-employed - how can I prove to my bank I'm a good risk?
August 15, 2006 8:09 AM Subscribe
UK Mortgage for the Self-Employed: how to convince the bank I'm a good risk? Also, broker or direct dealing with the banks?
Note: I am in the UK and need UK-specific advice.
I've been self-employed (as a translator) for just under 2 years now, and business is good. However, my tax returns don't yet reflect this, and I will soon want to apply for a mortgage (jointly with my SO, who is employed and who would be 'applicant 1'). I have filled in 2 tax returns, one showing a loss (year end Apr 05) and one showing a modest profit (year end Apr 06). I can fairly confidently predict that the profit on my next tax return will be around 4 times the size - and I can show that so far this financial year (from Apr 06) I have invoiced almost 200% of the amount I made last year, and that my expenses are lower. To get a mortgage on the property we have in mind, I'd need to prove income that is more than twice as high as last year's.
Will my building society (Nationwide, where I have been a customer in good standing for 10 years) think I'm a good risk? I keep good records and can produce them if required, to give a picture of my current situation. I don't have an accountant and have been filing my tax returns myself, using the HMRC online system.
Also, would we be better off approaching Nationwide directly (they seem to have competitive mortgage rates at present) or going via a broker? I'm rather ignorant on this point.
I'd be grateful for any UK-specific advice. Many thanks.
Note: I am in the UK and need UK-specific advice.
I've been self-employed (as a translator) for just under 2 years now, and business is good. However, my tax returns don't yet reflect this, and I will soon want to apply for a mortgage (jointly with my SO, who is employed and who would be 'applicant 1'). I have filled in 2 tax returns, one showing a loss (year end Apr 05) and one showing a modest profit (year end Apr 06). I can fairly confidently predict that the profit on my next tax return will be around 4 times the size - and I can show that so far this financial year (from Apr 06) I have invoiced almost 200% of the amount I made last year, and that my expenses are lower. To get a mortgage on the property we have in mind, I'd need to prove income that is more than twice as high as last year's.
Will my building society (Nationwide, where I have been a customer in good standing for 10 years) think I'm a good risk? I keep good records and can produce them if required, to give a picture of my current situation. I don't have an accountant and have been filing my tax returns myself, using the HMRC online system.
Also, would we be better off approaching Nationwide directly (they seem to have competitive mortgage rates at present) or going via a broker? I'm rather ignorant on this point.
I'd be grateful for any UK-specific advice. Many thanks.
I can't give advice on the self-employed bit, but I recently remortgaged with Nationwide, so can give some info that might be useful.
On the whole Nationwide are pretty good, and their rates are generally very competitive. However, despite the marketing of "affordability criteria", they are not really much more "flexible" than other providers, and mortgage advisors do not have discretion to make offers that deviate from their standard compliance policies. The offer is almost certain to be based on demonstrable, guaranteed income, modified (downwards) by other credit liabilities (loans, debts etc). This is likely to make your life difficult if you can't demonstrate a regular GUARANTEED income, or a sustained level of non-guaranteed income over a significant period of time. Still you don't lose anything by asking them - you should be able to get an appointment within a few days, and it will take an hour or two of your time.
There is no reason for you to not approach Nationwide directly if you want - it doesn't preclude you approaching a broker after. There is at least in theory no disadvantage to you as a consumer in going through an advisor - they are so heavily regulated that their advice to you will not leave you financially disadvantaged through corruption (although maybe incompetence), and they are probably the ones that are in the best position to help you with creative advice since you have unusual circumstances. However, you should do a little research and find a reputable local independent financial adviser (IFA) to help you. It is wise to steer well clear of estate agent's in-house advisors from what I have heard.
posted by bifter at 8:23 AM on August 15, 2006
On the whole Nationwide are pretty good, and their rates are generally very competitive. However, despite the marketing of "affordability criteria", they are not really much more "flexible" than other providers, and mortgage advisors do not have discretion to make offers that deviate from their standard compliance policies. The offer is almost certain to be based on demonstrable, guaranteed income, modified (downwards) by other credit liabilities (loans, debts etc). This is likely to make your life difficult if you can't demonstrate a regular GUARANTEED income, or a sustained level of non-guaranteed income over a significant period of time. Still you don't lose anything by asking them - you should be able to get an appointment within a few days, and it will take an hour or two of your time.
There is no reason for you to not approach Nationwide directly if you want - it doesn't preclude you approaching a broker after. There is at least in theory no disadvantage to you as a consumer in going through an advisor - they are so heavily regulated that their advice to you will not leave you financially disadvantaged through corruption (although maybe incompetence), and they are probably the ones that are in the best position to help you with creative advice since you have unusual circumstances. However, you should do a little research and find a reputable local independent financial adviser (IFA) to help you. It is wise to steer well clear of estate agent's in-house advisors from what I have heard.
posted by bifter at 8:23 AM on August 15, 2006
Oh - one last thing - you appear certain about what level of income you need to prove to get the mortgage you want. Unless you have actually got an "agreement in principle" from one or more lenders, I wouldn't assume that this is the case. The calculations can be based on the same multiple of combined income, or on different multiples applied to individual income, and other factors can come into play too (do you have any other debts? can you contribute a high deposit to the cost of the property?). On reflection you really should speak to an IFA - he will tell you what the maximum he thinks he can get for you is, given regulatory compliance. If it's close but not enough then you could start doing a bit more research to see if there is any way that you can game things in your favour.
posted by bifter at 8:31 AM on August 15, 2006
posted by bifter at 8:31 AM on August 15, 2006
Go via a broker. I've used Alexander Hall and Charcoal before and been pleased with the results. Last time I think I paid around £300.
posted by oh pollo! at 8:32 AM on August 15, 2006
posted by oh pollo! at 8:32 AM on August 15, 2006
This might not be as useful for you as other readers, but..
One trick is to set up a limited company that you're not the director of. Make the wife a sole director, or something along those lines. Then make yourself an employee of that company, and then even if you're self employed /as well/ you can legitimately claim to be 'employed' and the banks treat you like a human being.
posted by wackybrit at 9:12 AM on August 15, 2006
One trick is to set up a limited company that you're not the director of. Make the wife a sole director, or something along those lines. Then make yourself an employee of that company, and then even if you're self employed /as well/ you can legitimately claim to be 'employed' and the banks treat you like a human being.
posted by wackybrit at 9:12 AM on August 15, 2006
I'm not self-employed, but I did have a hell of a time getting a UK mortgage as a US citizen with high student debt. I went through a few brokers and they all told me to just forget about it, but finally succeeded when I applied with my partner, and approached the bank (HSBC) directly with a detailed budget that proved I could afford my bills.
They told me that it's all down to percentages -- if less than 60% of your combined pay will go to your bills, you're okay for that mortgage amount. I would expect that your clear record-keeping and an employed partner to back you up should help you quite a bit, and an overall budget wouldn't hurt.
posted by ukdanae at 9:15 AM on August 15, 2006
They told me that it's all down to percentages -- if less than 60% of your combined pay will go to your bills, you're okay for that mortgage amount. I would expect that your clear record-keeping and an employed partner to back you up should help you quite a bit, and an overall budget wouldn't hurt.
posted by ukdanae at 9:15 AM on August 15, 2006
Response by poster: thanks, everyone - wackybrit, I am the wife, but I take your point.
bifter - I did Nationwide's online 'mortgage promise' thing (they have an online affordability calculator which takes into account income and ongoing debts), which I think is an 'agreement in principle', using a conservative estimate (about half of what I actually reckon it will be) of my income for the current financial year. Using these figures, they reckoned they'd lend us quite a bit more than we actually need to buy the house.
and yes, we'd be able to put down a large deposit (around 35% of the purchase value). I'm still paying student loans to the tune of £130 a month, but between us we have no credit cards or loans apart from the current mortgage (which is in the SO's name).
posted by altolinguistic at 9:36 AM on August 15, 2006
bifter - I did Nationwide's online 'mortgage promise' thing (they have an online affordability calculator which takes into account income and ongoing debts), which I think is an 'agreement in principle', using a conservative estimate (about half of what I actually reckon it will be) of my income for the current financial year. Using these figures, they reckoned they'd lend us quite a bit more than we actually need to buy the house.
and yes, we'd be able to put down a large deposit (around 35% of the purchase value). I'm still paying student loans to the tune of £130 a month, but between us we have no credit cards or loans apart from the current mortgage (which is in the SO's name).
posted by altolinguistic at 9:36 AM on August 15, 2006
Best answer: I would say approach Nationwide direct to start with, as well as other High Street lenders.
If you do use a broker, make sure you go to an IFA who will search the whole of the market for the best deal and not a broker who will just offer you certain products upon which he will earn the most commission.
Be aware that if you apply for a mortgage and are turned down, it'll leave a 'footprint' on your credit score that will show up when another lender does a credit search. So it might be worth you making a few enquiries of prime lenders such as Nationwide, Abbey, Halifax, HSBC, etc., without making formal applications, in order to see if they'd offer you finance (do not go anywhere near the sub-prime market - the ones which advertise in the back pages of the newspapers or on daytime TV). A mortgage enquiry without a formal application won't result in you having to undergo credit scoring at the initial 'agreement in principle' stage.
All mortgage advice is now regulated, and you should be able to obtain advice for free, including something called a Key Facts illustration, which gives full particulars of what the adviser considers the best mortgage for you.
Obviously if you go to Nationwide, they will only tell you about their own products, likewise with HSBC, Abbey, etc.
I would also suggest you opt for
(a) a capital and interest repayment mortgage, as opposed to interest-only supported by an investment plan designed to pay off the capital (there is no guarantee the investment will perform well enough to pay off the mortgage in 20 years time); and
(b) a mortgage where you can, if you want to, make monthly overpayments to reduce the term of the mortgage. So if you have a bit of spare cash each month, you have the option to pay a bit more off your mortgage (or not, as you choose).
email in profile if you want any further info. I have some experience in this field.
posted by essexjan at 9:53 AM on August 15, 2006
If you do use a broker, make sure you go to an IFA who will search the whole of the market for the best deal and not a broker who will just offer you certain products upon which he will earn the most commission.
Be aware that if you apply for a mortgage and are turned down, it'll leave a 'footprint' on your credit score that will show up when another lender does a credit search. So it might be worth you making a few enquiries of prime lenders such as Nationwide, Abbey, Halifax, HSBC, etc., without making formal applications, in order to see if they'd offer you finance (do not go anywhere near the sub-prime market - the ones which advertise in the back pages of the newspapers or on daytime TV). A mortgage enquiry without a formal application won't result in you having to undergo credit scoring at the initial 'agreement in principle' stage.
All mortgage advice is now regulated, and you should be able to obtain advice for free, including something called a Key Facts illustration, which gives full particulars of what the adviser considers the best mortgage for you.
Obviously if you go to Nationwide, they will only tell you about their own products, likewise with HSBC, Abbey, etc.
I would also suggest you opt for
(a) a capital and interest repayment mortgage, as opposed to interest-only supported by an investment plan designed to pay off the capital (there is no guarantee the investment will perform well enough to pay off the mortgage in 20 years time); and
(b) a mortgage where you can, if you want to, make monthly overpayments to reduce the term of the mortgage. So if you have a bit of spare cash each month, you have the option to pay a bit more off your mortgage (or not, as you choose).
email in profile if you want any further info. I have some experience in this field.
posted by essexjan at 9:53 AM on August 15, 2006
Response by poster: thanks, ej - you gave answers to the questions I hadn't asked but should have. I'm making an appointment with an IFA today. On asking a Nationwide adviser, the sticking point is that I don't yet have two years' worth of accounts, and even if I did, they show a smaller income than I am now making. So I need an IFA to tell me what my options are.
we're definitely going for a repayment mortgage, and one which we can overpay if we want to.
posted by altolinguistic at 4:27 AM on August 18, 2006
we're definitely going for a repayment mortgage, and one which we can overpay if we want to.
posted by altolinguistic at 4:27 AM on August 18, 2006
Response by poster: not that I imagine anyone cares about my mortgage, but just in case... we are both cautious folks, and it turns out we weren't extending ourselves much in our house budget, so we only needed to state my partner's income in our (joint) application. It's approved now, and we're moving to a very nice house soon.
I did find out, though, that practically all lenders (except those offering 'self-certification' for which you pay with a higher interest rate) want, from self-employed people, two years' accounts and will not take prospective income into account.
posted by altolinguistic at 8:12 AM on October 10, 2006
I did find out, though, that practically all lenders (except those offering 'self-certification' for which you pay with a higher interest rate) want, from self-employed people, two years' accounts and will not take prospective income into account.
posted by altolinguistic at 8:12 AM on October 10, 2006
This thread is closed to new comments.
posted by ajbattrick at 8:22 AM on August 15, 2006