Self-Employed Borrowers: Watch Out!

If you can't prove your income, expect to pay over 7% for your mortgage - and a whopping fee.

Getting a good mortgage rate in the current market is difficult enough for mainstream borrowers, but what if you have specialist needs?

Borrowers who would find it hard to prove their income to a lender (like me, a freelance journalist) will find it even harder to get a competitive rate.

The self-cert market has boomed in the last five years with a rise in both the number of self-employed borrowers and those who are employed but would prefer not to have to prove their income. Self-employed borrowers may not be able to prove their income easily because:

• They are start-ups with less than the three years' worth of audited accounts usually required by lenders (I fall into this category )
• They minimise their net income (legally) to minimise their tax liability. This can make their financial position look weaker than it really is (I don't have this problem - my financial position looks weak enough without any creative accounting).

Employed borrowers might prefer not to have to prove their income for a number of reasons, such as:

• They are salespeople earning commission that is not guaranteed
• Their income is commission based and seasonal - such as those working in tourist-related professions
• They have more than one source of income - either more than one job, a divorce settlement or trust fund
• They are contract workers

Or......

• They wouldn't be able to get a mortgage based on their actual income so they inflate their earnings to get the property they want. Of course, this is mortgage fraud but, of course, it does go on, especially when property prices are rising.

Self-cert borrowers have found lenders clamouring for their business in recent years and rates gradually came down to levels close to mainstream deals. Customers got used to paying a minimal premium for a self-cert mortgage.

However, with the tightening of criteria and rising costs of mortgage funds, it should come as little surprise that self-cert mortgages have felt the pinch of the credit crunch. As lenders price for risk, instead of for volume, costs have risen on specialist mortgages.

Who is offering self-cert products?

There are fewer lenders in the self-cert market than there were 12 months ago, but mainly this is as a result of specialist lenders pulling out of the market altogether, rather than any reflection on the sector.

In fact, of the existing specialist lenders that offered self-cert last year, the vast majority still do, and the impact of the credit crunch has been much more limited than, for example, it has on the sub-prime market. Most self-cert lenders are intermediary-only providers and do not deal directly with the public.

How has the market changed?

Self-cert lending has seen criteria tighten, in the same way as the mainstream market. This seems more acute because criteria were always slightly more restrictive than mainstream lending. For example self-cert borrowers have always needed a bigger deposit and paid slightly higher fees. That has now been amplified.

The lowest rates on self-cert mortgages are now only available up to 75% loan to value (LTV) -- in other words you need at least a 25% deposit to get these deals. But how low are these rates? Not very, unfortunately.

BM Solutions has a three-year fixed rate at 7.39% and a lifetime tracker at 7.44%, but the fix comes with a 1.5% fee and even the tracker has a 1% fee.

On a £200,000 25-year repayment mortgage this would mean:

• Fixed rate monthly repayments of £1,463 and fees of £3,000
• Tracker rate monthly repayments of £1,470 and fees of £2,000

One of the most competitive rates around is from Bank of Ireland Mortgages -- a 6.99% five-year fixed rate with a 1% arrangement fee, available up to 75% LTV.

But what if you don't have a deposit of 25%?

Many borrowers will not have such a deposit, or perhaps you are an existing self-cert borrower and you don't have 25% equity in your property. This will be the case for many, especially those who bought their property in the last year or two.

If you have a small deposit or level of equity, there are a few deals on the market available up to 85% LTV -- so you need to put 15% of the value of the property down as a deposit. But the rates shoot up on these products.

Bristol & West will lend up to 85% LTV if you fix your rate for three years. The pay rate is 7.99% with a 1% arrangement fee. On the £200,000 example given above this would mean:

• Monthly repayments of £1,542 and fees of £2,000

If you are willing to fix your rate for five years, Bank of Ireland Mortgages has a 7.39% deal available up to 85% LTV, with a 1% fee.

If you don't have a deposit of 15%, quite simply you can't get a self-cert mortgage in the current market.

Equally, existing self-cert borrowers will struggle to get a new deal without 15% equity in your home. In this case you will be forced onto your lender's standard variable rate at the end of your current deal until a product you can access becomes available, or your equity increases.

What should you do?

Visit a mortgage broker. True self-cert deals are still categorised as specialist and many of the lenders that offer them, including those mentioned above, will only provide their products through a qualified and authorised intermediary.  If you need a true self-cert mortgage, where there is no verification of income needed, a high street lender probably won't allow it. You should get yourself off to a broker.

And hurry. Like all mortgages, self-cert rates are changing on daily basis.

More: Beware Of Sneaky Mortgage Fees | Four Steps To A Cheaper Mortgage