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Understanding mortgage lending to the Self Employed

There is a big difference in terms of how mortgage lenders assess the income of self employed applicants to those who are employed and receiving income on a PAYE basis, this short guide explains how income is assessed and some of the pitfalls.

You will be classed as Self Employed if you are a sole trader, in a partnership or if you own more than a set percentage of an Ltd company (typically 25%). PAYE employees who also own a significant share of a different company may be classed as having income from employment and self employment.

If you are classified as self employed the overwhelming majority of mortgage lenders will require a minimum of two years full accounts before you can be considered for a mortgage, there are certain exceptions for example where an applicant buys a share of an Ltd company with existing trading history. This means for many people that if you are considering entering into any of these types of employment then securing a new mortgage deal prior to making the switch to self employment could be a good idea.

When classed as self employed the lender will base their affordability assessment on your net pre tax profit, not your turnover. This is essentially your money taken in minus all allowable deductions and so will therefore usually be the profit figure from your tax returns.

If you are the owner or major shareholder of an Ltd Company you may well pay yourself PAYE income and dividends which is tax efficient and the two added together would be considered your profit. It is important to remember that leaving profit within the business as capital rather than drawing down these funds as dividend income will limit the maximum borrowing potential available to you. It may be worthwhile taking a “tax hit” in the accounting year prior to arranging a mortgage if the previous year’s drawings are low as many lenders will refuse to look deeper into accounts and base assessment on actual profits rather than just your personal PAYE and dividend takings.

Some lenders will base their lending figures on the last years accounts only however if your accounts figures are decreasing or have gone up and down most will take an average over two to three years.

Proof of income for the self employed will normally be either your SA302 or self assessment tax computation, or a copy of your accounts often for the last two to three years. Some lenders will request accounts certificates in these are not available. The sole traders or those submitting their own tax returns it usually pays to keep your SA302’s handy for coming mortgage applications although you can request reprints from HMRC.

Mortgage Broker Q&A – Mortgages for Flat’s above shops and commercial property

Question : I am looking to buy a flat above a shop or other commercial premises and have been told this can be difficult, what do I need to be aware of?

Answer: Lenders always have to be aware of risks that may affect the value of a property and saleability should the loan go into default. A flat above a shop or commercial premises has several risks which a lender will consider when deciding whether to lend.

These will include the nature of the business which the flat is above; if it is something which would cause little disturbance to the owners of the flat such as a florists or estate agents it is less of a risk. However if it were a fish and chip shop for example where late opening hours and food smells may affect the ability of the lender to re-sell the property then it is likely that it may be difficult to arrange a mortgage.

Consideration will also be given to the area in which the flat is located. A flat over commercial premises in an area like Chelsea or Knightsbridge would still command a significant value and appetite for lending. However the same property in an unfashionable part of a city like Manchester or Liverpool may be much more difficult to arrange a mortgage on.

Another important factor would be the access to the property, if it has a connected access to the commercial premises then insurance would be very difficult to arrange separately and this would also restrict lending.

You should be aware as a potential purchaser of such a property of these same risks as properties which are difficult to mortgage may in turn be difficult to sell. For further information and advice on flats over commercial property call one of our mortgage advisors on 08454594490 for independent mortgage advice.

Mortgage Broker Q&A – What is a basic valuation for mortgage purposes and what other types of survey are there?

Most typical purchase mortgages and many remortgage products will include a fee for a basic valuation.
This valuation is not for the buyers benefit and doesn’t protect you in the event of a property defect or if work is subsequently required for things like damp treatment or subsidence.

You are paying for some form of valuation to satisfy the lender that the property being mortgaged is suitable security for the loan. The surveyor owes no duty of care to you as the buyer despite the fact that you pay for it.

Many borrowers believe that this basic valuation is suitable evidence that the property is in a good state of repair, and many have found out in court to their dismay that this is not the case.
Some basic valuations will not even involve entering the property it may just be a “drive by viewing” or even performed on an AVM or “Auto Valuation Model” which is a computerised average.

Many lenders will offer either a homebuyers report or a full survey as a form of extra or upgrade to the basic valuation. These survey types do offer you some legal protection and do entitle you to a duty of care from the surveyor in question.

A homebuyers report should identify major problems and structural defects, where as a full survey should be very thorough and identify any serious issues including electrical and dry rot problems etc.
If you buying a property and you want to know that the property is structurally sound then don’t rely on the basic valuation to protect to you because unfortunately it will not.

The time is right to reduce your mortgage borrowing

Many people lay the blame for the credit crunch firmly at the feet of the sub-prime mortgage sector, others have pointed the finger at merchant banks and hedge funds, whilst some have even suggested that China is directly at fault for the current state of western finances.

To a certain extent all of these accusations carry some merit (most particularly the one regarding the sub-prime mortgage sector) but there is another factor that comes into play regarding those mortgages which is perhaps more fundamental, and likely to cause more long-lasting damage.

Over the last decade and a half the value of the average home has sky-rocketed. Some houses increased by as much as 100% in value over a decade. The rise in prices was largely sustained by a ready supply of credit, this increased demand massively, and as there is relatively fixed supply when it comes to housing, the only place that the price was going to go was up.

This resulted in large numbers of people borrowing on houses that were far beyond their means, it seemed that everyone could get a large enough mortgage to pay for a house regardless of what their particular financial circumstances were like.

For those people who have stretched their income now is the perfect time to reduce your levels of borrowing and save money in the long term on your mortgage repayments. The new government and the recent emergency budget indicate we are likely to see relatively low interest rates for some time to come although bank base cannot remain this low forever.

It’s therefore a good time to look at remortgaging and trackers in particular can look like good value for money in the short term. There are several ways you can reduce your mortgage in this period of low interest rates. You can remortgage and reduce your mortgage term, although you should pay attention to how this will affect your repayments when rates do rise. Another option is to look at offset mortgage products which allow you to pay no interest on the equivalent amount of savings held in the offset account however offset rates continue to be a little uncompetitive.

For many the best of way of reducing your mortgage may be to use a savings account and then make use of the typical 10% overpayment facility offered by most mortgage lenders. It’s worth checking whether you have the right to make overpayments and to what extent but the majority of products do allow this. Interest rates aren’t particularly attractive at the moment but banks like Santander are offering some excellent deals on savings accounts that are definitely worth a look.

If you’ve survived the bubble bursting, whatever state your finances are in, it’s important that you pay down any debts you do have whilst interest rates are low, and save what you can in order to give yourself a bit of a cushion should the situation deteriorate further, or if interest rates rise and your mortgage costs a little more in the future.

Hope for the Housing Market

A recent report by the Council of Mortgage lenders has revealed that the number of homes repossessed in the UK fell by 7.5% in the first three months of 2010. Home repossession is one of the ultimate fears for any homeowner, and the fact that the figure is falling is perhaps proof that the finances of the nation have recovered a little.

In terms of the actual number of repossessions that figure fell from 10,600 homes in the final three months of 2009 to 9,800 in the first three months of 2010. Most encouragingly that number was 26% lower than the same period in 2009 when an enormous 13,200 people lost their homes.

The CML said that the biggest factor in the drop of repossessions was the drop in the interest rate. In March 2009, partially in response to the rising number of people losing their homes, the Bank of England dropped its base interest rate to 0.5% and has kept it there ever since. This meant that many people who were looking at the precipice, even those who found themselves unemployed, were able to claw back some of the arrears on their mortgages.

On the back of these positive figures that CML has said that it may revise it’s original forecast of 53,000 repossessions for the year should there be no further problems with the economy.

The news did, however, come with a warning from the CML. If interest rates were to increase, it warned, many hundreds of thousands of people could find themselves struggling to meet higher repayment costs and therefore find themselves facing the prospect of repossession. It warned that it was imperative for the BoE to keep the rates low for as long as possible, even in the face of rising inflation.

Mortgage Interest rates have however fallen to record lows for those customers with a sizeable deposit and good credit history. The personal loans market is also improving steadily with Santander’s flagship product for existing customers having a typical of 8.9%, and secured loan rates also falling to levels more in line with previous years.

At the end of the day the news from the CML is positive, though there is the warning that things could deteriorate at any moment and we should not forget that even though the numbers are dropping, nearly 10,000 people lost their homes in the first three months of this year, the economic crisis, whatever the figures may say, is very much still with us.

Get Instant online life insurance and protection quotes from up to 15 insurers now from Rightmortgageadvice.co.uk

Just a short post to announce that you can now get live online quotes direct from our main site for Life Insurance, income protection, Mortgage Protection and Critical Illness Insurance direct from the Rightmortgageadvice.co.uk website.

To get an instant quote today follow this link for Life Insurance Quotes.

If you have life insurance cover which was arranged prior to a marriage, or before increasing your mortgage value or mortgage term it may need to be reviewed. It’s crucial to ensure that your protection requirements are reviewed regularly to ensure that it is arranged in the most tax efficient manner and will benefit the people you intended it to.

To discuss protection requirements and products available call one of mortgage protection advisors on 03454594490 for advice.

Traditional Buy to Let mortgages not the only option for larger landlords

A recurring theme when speaking with buy to let investors across the country at the moment is the difficulty being caused by the dire lack of realistic products for remortgaging or making new purchases.

With current requirements for a minimum deposit of at least 25% and interest rates beginning around the 4% mark for variable rates with deposits of 40% and over its easy to see how many think the current markets offerings are nothing more than a cynical attempt to recoup wider losses by the big banks. And with arrangements fee’s going at anything up to 3.5% I have to agree with them.

There is however another option for Landlords who hold several properties or who have a sizeable income aside from their rental. The private banking sector is increasingly taking up a larger share of this market and with potential interest rates starting from 2.5% or so above base rate and fees typically between 1-2% of the loan balance they make a very attractive proposition to the right clientele.

These lenders not only have the experience in dealing with larger loan sizes and non standard properties, but the human underwriting to look at individual cases which would not meet the standard criteria of high street buy to let mortgage lenders.

The downside is that they typically require assets of around £250,000+ without taking your main residential property into account and or an income of over £100,000 per annum. So while they could prove invaluable for those landlords with a decent portfolio gearing with 25% or more in equity or for the first time investor with a good main income they won’t provide any refuge for the many landlords who worked at maximum leverage and left themselves with less than 25% equity in the their overall portfolio.

If you have several buy to let properties on or about to come onto their standard variable or indeed of you have a significant income instead and would like to find out whether a private banking arrangement could be suitable contact speak to one of our mortgage advisors on 0845 4594490 for independent mortgage advice.

Mortgage Broker Q&A – Why is a life insurance policy written into trust?

Question; I have been advised that my life insurance policy should be written into a trust, why is this?

There are several reasons why certain life insurance or assurance policies should be written into trust and generally they are to do with avoiding tax liabilities and or ensuring that the proceeds of a policy will reach the intended recipient.

About two thirds of people in the UK don’t have a valid will and testament and die “intestate” which is the term for an estate which does not have a valid will in place to determine where and how the estate proceeds will be divided up (sometimes there is a will in place which is no longer accurate and can be invalid for this reason too).

In this case there are rules which govern how the estate is split which can often leave the proceeds of a life policy being paid out to someone who is not the intended recipient.

A good example is a couple who are unmarried and have arranged a life policy on the life of the main breadwinner to repay the mortgage in the event of death, in this case if there were no valid will in place the proceeds of the policy would likely be passed on to the deceased’s family rather than the surviving partner which could include children from a previous marriage or the deceased’s parents for example.

In another scenario a life policy which was written to pay out to a couple’s children on the last survivors death in order to cover inheritance tax liabilities would itself become part of the deceased’s estate, and therefore liable to inheritance tax itself if it were not written into trust.

The rules around taxation and particularly the taxation of trusts change regularly and this is one of the reasons why mortgage advisors will recommend a regular review of your circumstances. A policy once written into trust may well one day be better off outside of it and therefore it’s important to regularly check that existing provisions are still arranged in the most tax efficient and sensible manner possible.

If you have a life insurance policy which you think may need to be placed into trust or to speak further to a mortgage advisor call 0845 4594490 for independent advice.

How to predict a recession and how to end one – the definitive guide

Hello and happy new year! doesn’t it just feel great to be back in business? No? Perhaps the recession blues are getting you down then.

And on that note I thought I would begin the year with something completely unrelated to mortgages but connected to todays completion of the new world’s tallest building in Dubai.

You see there’s a lot of talk flying around about how can we ensure that this never happens again, that theres never another recession or credit crunch and that banks are never again allowed to overstretch themselves.

The answer to this question is in fact that you can’t. What goes up will in fact go down sooner or later, and growth is always followed by decline at some point down the road. Gamekeepers have known this longer than most and I first heard it put into terms by a comparison to the populations of foxes and rabits.

Fox and Rabbit populations have been recorded for centuries and it has long been observed that Rabbit populations mushroom until overcrowding causes disease to make them weaker and more vulnerable to predators like the Fox. And so Fox populations have also followed Rabbits peaks and troughs because the number of Fox’s inevitably goes up as Rabbit populations increase, but then when the Rabbits decline a lack of food for the Fox also inherantly leads to Fox populations going down too.

What’s the point of this? In the middle of the last boom I heard a theory that recessions can be predicted as they always appear to happen upon the construction completion of the world’s tallest building.

Now I had forgotten about this altogether until I heard on radio 4 this morning that the new world’s tallest building has just been completed in Dubai. The theory says that as building the world’s tallest building is a mark of prosperity then it is something that a country will only consider when the good times are rolling, and by the time its off the drawing board and into construction its pretty likely those good times are coming to an end.

So if you want to know when to sell everything, and go on an extended world tour keep an eye on those construction projects!

Now as for how to end a recession its pretty simple. Stop putting prices down and put them up instead, it’s just human nature that if prices are going down you wait to buy until their cheaper and if their going up you buy now before they get any higher – And that my friend is why you can gaurantee one thing,

It will, most definitely happen again.

Fin

When will big businesses learn and switch their brains on?

It doesn’t surprise me in the least that our banks needed bailing out, not because of “casino trading floors” or “fat cat pay packets” but just simply because on a day to day basis I am confronted by the complete lunacy of big businesses and the categorical failure to look at the big picture.

Myself and colleagues once helped one of the UK’s largest Insurance companies sort out their customer service by explaining to them that it was probably a bad idea to send brokers all over the country individual notifications of a cancelled policy with no details of the reasons for cancellation and outstanding payments owed, because that meant they had to handle thousands of calls from brokers every day just to ask why the policy had cancelled and what it would cost to re-instate, information they could quite easily send on the same message. These calls were going into the same service team that dealt with their customers with an average hold time of twenty minutes.

The same insurer had an online broker quote system that allowed you put in a postcode on the first page and on the last page twenty minutes later it would dutifully inform you that it was a decline due to flood risk or area! We helped them re-develop their system but with a little logical thought from their IT team in the first place there would have been no need.

One big bank is proud to inform all brokers that they have moved to a paperless office! Hoorah! However because they insist on you faxing every document to them brokers all over the country probably aren’t enjoying a similar lack of paper of in their offices. Have they heard of the wonders of email? You can actually send a message electronically with documents attached to them, and unlike faxes the output at the other end is actually legible? You might argue you can email to a fax number, but not without an email to fax account and what’s the point anyway? It reminds me of the operation Good Guys episode where blank paper is just being faxed over from another station!

But the icing on the cake was the credit card company who after taking about seventeen security questions and proof of ID over the phone just to let me speak to them, informed me that to change my account address I would have to write them a letter. Yes because as we all know the royal mail is the most secure system of passing information available anywhere, and anyone who has my credit card can probably fake my signature but wouldn’t normally be able to guess my date of birth, place of birth, mother’s maiden name etc.

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