Top tips to get mortgages for self-employed clients

This is the view of Jamie Smith-Thompson, who cited the case of one client - a profitable restaurateur - whose desire to remortgage to pay a tax bill based on his stellar profits has seen him offered more than 8 per cent APR from one high-street bank.

Mr Smith-Thompson, whose advisory firm, Portafina, specialises in contractors, freelances and the self-employed, calls this rate a "joke".

He comments: "I've been in financial services since 1999 and even during the credit crisis of 2008, I have not seen things as tough for self-employed people.

"Criteria now is the most stringent that I have ever seen - no doubt a hangover from the credit crisis and the various financial regulations brought in - which have made lenders scared about lending to anyone who could be seen as a risk."

When you advise clients on the options available from the market, you are his or her chief negotiator.Louisa Sedgwick

Moreover, trying to keep on top of ever-changing criteria can be problematic, as John Phillips, group operations director for Spicer Haart and Just Mortgages, says: "You have to know your lenders' criteria and ensure your knowledge is up to date. 

"Criteria changes rapidly, almost on a weekly basis. It is essential that advisers are on top of this so they can advise their self-employed clients correctly."

Shopping around

Mr Smith-Thompson also says advisers have to be on the ball and be prepared to shop around for their clients.

He recommends looking further afield than the high street, for more niche or specialist lenders, or for newcomers and challenger banks who may be prepared to lend to the self-employed at decent rates and higher loan-to-value ratios.

Also, perhaps for those considering a remortgage, Mr Smith-Thompson says it could be worth looking at second charge or bridging loans.

Buster Tolfree, commercial director of mortgages for United Trust Bank, says: "There are a variety of first and second-charge lenders in the market, keen to lend to the self-employed.

"And as these lenders look to grow volume and market share, it is likely we will see further product development in the sector."

Figure 1: Case study

Paperwork

Advisers dealing with self-employed clients must also get to grips with lenders' need for evidence.

Because lenders require at least two to three years' proof of earnings, which self-employed people usually submit with their tax returns each year, clients often use their accountants to provide the necessary information. 

However, advisers should check which accountant qualification is required by the lender. 

This is the advice of Keith Street, vice-chairman for group lending at The Northview.

He says: "Not all lenders will have the same requirement, so it is always worth taking time to understand exactly what qualification is needed and ensure the accountant possesses this.

"Should the accountant not hold the required credentials, lenders may be able to use your client's SA302 instead.

The SA302 is a form from HM Revenue & Customs, which many lenders will need before they start quoting on a mortgage for the self-employed. 

It provides provides evidence of your client's earnings (‘SA302’) for the last four years, once they have submitted their self-assessment tax return.

Your clients can get a tax year overview for any year and this can provide evidence of income. 

HM Revenue & Customs has also published a list of lenders who accept the SA302 form as proof of earnings, including Aldermore, Barclays, Leeds Building Society, Mortgages PLC, Santander and Virgin Money. 

Mr Street adds: "When submitting the SA302, brokers should make sure the client has used the actual HMRC form, not just the tax calculation based on it.

"The SA302 should be accompanied by the most recent three months of the business' bank statements, as these are needed to demonstrate the status of the company's finances.

"For sole traders, a personal account they use for conducting business can be used."

Add to this documentation information requirements about a healthy credit score and report.

Matt Andrews, managing director at Bluestone Mortgages, explains: "Whether a client is self-employed or employed, lenders want to see they have a good financial history and can manage credit properly.

"It is a good idea to get clients to check their score with the three major UK credit reference agencies, as different lenders use different agencies."

Figure 2: Useful checklist:

• Accounts - make sure clients have kept really accurate accounts (or that they get these from their accountant).
• Accuracy - make sure accounts are accurate and not understating income to minimise tax bills, as this can be to the detriment of getting a mortgage.
• Criteria - know your lenders' criteria and try to keep on top of it; it can change from week to week.
• Deposits - a good deposit can help the self-employed, especially if the lender is offering a reasonable interest rate but only if the loan-to-value is 60 per cent, for example.
• Education - make sure customers understand the requirements on them.
• Packagers - specialist packagers have a role to play, especially where exclusive products may be available which might not otherwise be an option when submitting directly to the lender.
• Prepare, prepare, prepare - there are myriad mortgage options but not all of these will be the most appropriate. It therefore pays to do plenty of research well in advance of starting the process.
• Year end date. Many self-employed people work to the calendar year but others work to a tax year or even August to August. Therefore if a lender asks for 12 months worth of accounts, the full working years' worth of documents must be provided. Mr Street warns: "Brokers could submit documents that cover a period in excess of 12 months, as these can be set to the financial year end instead of the calendar year. However lenders might calculate the earnings pro-rata if this happens, and this could result in a figure lower than the full 12 months figure."

Transparency and underwriting

Louisa Sedgwick, director of sales for Vida Homeloans, says it is vital that once advisers have gathered as much evidence of their clients' financial affairs as they can, they present the information honestly, openly and positively.

She explains: "Present the case in the best light you can but be transparent with the lender. There is no point glossing over something that an experienced underwriter has seen before. 

"When you advise clients on the options available from the market, you are his or her chief negotiator.

"Therefore if you want a deal that suits all parties, it is wise to build trust and rapport with the mortgage lending officers and underwriters as you present the case."

Charles Haresnape, group managing director of mortgages for Aldermore, comments: "Advisers should look to maximise the advantages of manual underwriting, and it pays to build up a good relationship with a variety of lenders.

"With a good track record in place, lenders will look more favourably on complex cases - although there is no secret formula to automatically produce results."

Housekeeping

Donna Hopton, founder of mortgage broker forum Cherry, suggests advisers should encourage their clients to "carry out housekeeping on their finances."

She explains: "Advisers should make sure their clients have little to no debt, and perhaps counter-intuitively from a tax standpoint, they need to ensure the income disclosed on tax returns to HMRC is as much as it can be, as they will rely on this to obtain a mortgage.

"It is all well and good trying to reduce tax, but potential borrowers need to be aware  - well in advance - that efforts to reduce tax by, for example, investing heavily in their business, will result in limiting their potential to borrow."

For this reason, maintaining good professional partnerships and networking with accountants can stand an adviser in good stead when it comes to working with self-employed clients.

As Jane Benjamin, head of relationship management for the Sesame Bankhall Group, concludes: "Whatever 2017 brings for us as an industry, it will be an interesting year, with broker professionalism, knowledge and education critical for a solid market."

simoney.kyriakou@ft.com