Stepping out on your own is a big step and a risk by anyone's standards. It normally means sacrifice for at least a few years, whether in money or time. It's normally during this period that it becomes extremely difficult to obtain mortgage finance. Most lenders want to see a track record before advancing funds and will look for two, maybe even three year's audited accounts. This can be difficult enough, without being treated differently to an employed individual. Mortgage lenders tend to look at gross income for employees and income after expenses for self-employed. (If things weren't bad enough already).

How Business Works

We all know that in the early years of starting a business, the costs are high. The idea is to offset as many expenses as possible, things like office furniture, transport, along with computer equipment and redecoration. (The list can be endless).

It all seems a good idea at the time, but you will not realise the consequences until two years after the event. It may be good avoiding tax and appearing that you are earning zero income, but what happens when you need to convince a mortgage bank, that you are a good risk.

Changing Market Place

Many lenders are waking up to the idea, that self-employed people actually have more control of their lives. They calculate the risk, have discipline and are motivated. Some even left the security of an employed position, as they realised that they possessed a specialist skill, or the potential to exploit a niche market. Mortgage banks and building societies are waking up to the idea of supporting the entrepreneurs of tomorrow. 

Starting Out

There are a number of actions that a new business person can make when starting out, which will aid their ability to raise finance. They should open a specific business account. This will enable the presentation of bank statements. These will show your cash flow and your ability to control the business finances. Although they would not be accepted in isolation, they make good supportive evidence. You should also appoint an accountant, the cost for a sole trader, could be anywhere between £300 and £500 for their help with self-assessment. They normally will save you this in the amount of tax that you pay. A reference from an accountant is worth a great deal when approaching possible lenders.

What to Do…

There are a host of lenders that will advance funds on a self-certified basis, or indeed will not check income if you have enough cash or equity within your property. The following is a summary of the limits that apply. 

Borrowing 60%

There are a number of high street lenders that are exercising common sense and not asking for any proof of income when there is 40% cash involved. This presents a very low risk to the bank and even though they would not like to repossess a property, it is unlikely that they could lose on this deal. These facilities are generally offered through mortgage brokers who are able to offer advice to the borrower about affordability. You should be able to name your accountant (Chartered or Certified) and have been trading for one year. The rates on offer are standard high street percentages and amongst some of the warmest deals on the market...

These lenders want you! 

Borrowing 80%

Even up to 80% the odd high street lender works on the same basis. Provided that your credit record is satisfactory and you have a 20% deposit, they will work on a similar basis to the above. You will not be required to fill in your income, but you will again need to be able to name your accountant (Chartered or Certified). They will also normally require at least a years trading before they will consider you (although this is not normally checked). The interest rates are likely to be slightly higher than below 60%, but after all they are taking a higher risk.

Borrowing 90%

Specialist Self-Certification lenders will advance up to 90% if a potential borrower has a clean credit record. The rates of interest vary, dependent on the length of trading. Higher rates for only one year, with better rates reserved for those with a two-year history. Normally the lender requires an existing mortgage, to check that there have been no arrears or defaults and a reference from your accountant (Chartered or Certified). They will ask questions on how long you have been trading and if in your accountant's opinion, they think you can afford the loan. Rates will be higher than the high street, but a carefully selected deal could get you on the market and allow you to move on in maybe 2-3 years time. 90% is only available to existing mortgage holders. 

First Time Buyers

Contrary to wide belief, self-certified lenders do not advance up to 90% for First Time Buyers. This seems to be a risk too far! They will, however, advance 85%. It is a good idea to ensure that you are registered on the Voters Roll and maybe even have an open line of credit, such as a credit card or personal loan. Far from going against you, this will demonstrate experience with credit. These lenders will be looking for an unmarked credit history and the fact that you deal with a Chartered or Certified Accountant. The rates on offer will not be perfect, but not the end of the world.

Go for it!!

Being self-employed may not be as restrictive as you first thought. There are plenty of lenders willing to help, provided of course you set up proper financial records from the start. If you are a first time buyer without a credit history, you should work on obtaining one. Prove you exist! 

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