Many people accept that the concept of a job for life is long gone. Redundancy is widely recognized as a fact of life in the modern workplace. Many people in full-time employment have very variable incomes, depending on actual hours worked and targets achieved. In spite of all of this however, lenders still tend to look upon the employed as being a lower risk than the self-employed.
Why Lenders Are Wary Of The Self-Employed
The current relationship between lenders and the self-employed is a classic example of the phrase “Once bitten twice shy”. When the economy was moving at full steam and the housing market with it, lenders took a very relaxed attitude to ensuring that borrowers could repay their mortgages. After all, continually rising house prices meant that for a time it was perfectly reasonable to assume that if a borrower ran into financial difficulties they could resolve their mortgage debt quickly and easily by selling their property.
With this in mind the self-employed were often offered “self-certification loans”. These were loans which simply required the borrower to make a statement confirming their income, rather than having to produce actual evidence of it. They have gone down in history under the name of “liar’s loans” and created serious problems for the banks. This is one of the reasons why the affordability criteria were introduced.
What Does Affordability Actually Mean?
Affordability means that a borrower must have the wherewithal to meet all relevant expenses including their mortgage repayment. Potential borrowers can therefore expect a lot of questions regarding their current situation and future plans. They can also expect to be asked to provide documentation to support any points in favour of their application. Potential borrowers who can demonstrate good money management and a strong grip of the family finances are in the strongest position. Ideally they should also have a healthy deposit and a financial plan for managing the years ahead. With this in mind, it can be helpful to talk to a qualified mortgage adviser well in advance of the application to ensure that your finances are put in their best possible shape.
What Does This Mean For The Self Employed?
In theory, the self employed are judged by the same criteria as the employed and have access to the same products. In practice lenders are well aware that the nature of self employment can make life much more precarious. They can be let go at any time, and possibly without notice let alone a redundancy payment. Lenders are also aware that it is much easier to run an apparently successful business for 6 months or a year than it is to run one consistently over several years, let alone over the extended lifetime of a mortgage. This means that for the very recently self employed, the chances of securing a mortgage are very poor. Those who have been running their own business for two years or more stand a much better chance in the mortgage market, provided that they have kept accurate and verifiable financial records and are otherwise financially healthy.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.