Currently, approximately three and a half million people in the UK are self-employed and it is predicted that that figure is set to rise over the next decade.
While many of these enterprises are successful, it can often be problematic for the self-employed to buy a home, as mortgage companies can be mistrustful of anyone who is unable to provide evidence of their earnings through standard means, such as pay-slips.
People in this situation often turn to self-certification or ‘self-cert’ mortgages, in which they are asked to state their probable annual income, rather than providing documentary proof of the required information. As well as working for the self-employed, this system provides an alternative for those whose income is commission-based or perhaps works within a specialised field where their income rate can fluctuate.
For anyone, a mortgage is likely to be the biggest, single financial commitment they’ll ever have to consider; be it self-certified or standard. However, those turning to self-certification (or non-standard mortgages) are likely to find they pay more than for a standard one.
The reasoning behind this is that, statistically, a large percentage of small or self-employed businesses cease trading within their first two years. Typically, a self-cert mortgage owner will be asked to pay a higher deposit and can expect to be offered a loan-to-value rate of around 75 – 90%, whereas a standard mortgage offer will have a typical loan-to-value offer of around 95%.
Situations can then arise where a remortgage becomes necessary: a change in family circumstances can mean the need for more space and, consequently, a larger house. Some mortgages are portable, in that they can be transferred to new properties. Upgrades to the existing property can require large expenditure or even the consolidation of outstanding debts can be a reason behind considering a remortgage.
A remortgage is also available to the self-employed who have a self-certified mortgage. An application to the original lender will provide the likelihood of this being a possibility, although many like to ‘shop around’ and apply to other mortgage lenders in the hope of getting a more competitive rate. A consultation with a mortgage broker can be helpful, although it is likely to cost money.
As the market itself is extremely competitive, someone owning a mortgage or remortgage can potentially save themselves some money by keeping an eye on the market and moving between lenders as a more competitive rate becomes available. However, deciding to move between lenders can carry penalties; costs can be incurred for leaving a lender before the contract expires and the mortgage is paid off. There is also a fee involved in joining a new lender and there are likely to be legal costs incurred during the process.
Self-certified mortgages and remortgages can also vary in their value for money. There are those who offer ‘financial holidays’ and the opportunity to pay more when the funds are available. This is a useful facility for anyone self-employed or who earns through a commission-based job, as it can cater for the fluctuation in earnings.
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