Certify yourself for a cheaper loan

Authors, actors and accountants have always worked for themselves. But with changing job patterns, those in occupations such as nursing, teaching and computing services are now often also self-employed. And that can be a red light when it comes to mortgages.

Around one in eight of the workforce is now wholly or partly their own boss with around 10,000 each week trying to go it alone for the first time. But only a small minority of home loan companies have woken up to this change by offering "self-certification" deals where customers do not have to produce documentary proof of earnings.

The great majority continue to lump the self-employed - and those who set up their own one-person or family companies - as bad risks along with mortgage defaulters and fraudsters.

"Self-employment smacks of dodgy dealings in financial services circles," says Stephen Alambritis of the Federation of Small Businesses. "They're seen as tainted and lumped together with bankrupts. Most lenders are not interested and our members complain that those which even bother to reply to enquires often charge an arm and a leg in interest rates."

And if they grant loans, they insist on two or often three years' worth of audited accounts, disadvantaging those who recently made the move from employment.

But becoming your own boss can be a key time to apply for a mortgage. Many people decide to move home - often searching for extra space so they can run their business from home. And others want to cash in on the growth in property prices so they can finance their new venture at lower interest rates than a business loan from a bank.

One solution is self-certification, where the prospective mortgage customer estimates their own annual earnings instead of relying on an employer or an accountant to come up with the figures. It sounds like a recipe for loan applicants to ask for too much - or to put in fraudulent requests at the other extreme.

But that is not quite as easy as it sounds. "Each application is individually underwritten," says Denzil Morgan at Bristol & West which has lent some £250m since it started self-certification last December.

He adds: "We don't credit-score because it is usually not helpful with self-certification applicants. But we do check on past loans to see if they have shown a good commitment to regular repayments and identify the sources of income. Lifestyle factors are important - we would not lend £250,000 to someone whose previous home was worth £25,000."

Bristol & West's typical loan is around £75,000 - roughly in line with the national average. Morgan believes self-certifiers are conservative in their requests.

Besides helping homebuyers who cannot produce audited accounts, self-certification also enables borrowers to raise cash on their real earnings rather than sums shown by their accountants.

Paul Howard, of Mortgages plc which specialises in loans to those with bad credit records and county court judgments, says there is a dichotomy between accounts which are audited to minimise taxable income and the need of borrowers to raise cash based on what they actually earn.

"Those mainstream lenders which give mortgages to the self-employed and people running their own businesses just look at net profits. They disregard dividends, which are used in tax planning by some small companies, or the way some family concerns pay regular wages to children or others," he adds.

Bill Dudgeon of The Mortgage Business, a Bank of Scotland offshoot focusing on self-certification, believes that accounts are historic - they do not reflect future cash stream from a growing firm.

Lenders also protect themselves by insisting on a sizeable deposit - 15% to 25% is the usual minimum - with the typical borrower putting up 40% of the property's value. A few lenders such as Capital Home Loans, Irish Permanent and Mortgage Express will accept 10% deposits.

Moneyfacts shows there are 15 lenders which currently accept self-certification applications. But the only high street names on the list are Bristol & West and Abbey National - and the latter only accepts forms from brokers rather than directly from branches.

Self-certification rates tend to be on the higher side - especially on loans which have lower deposits, where standard variable rates can go as high as 8.74%. But many are lower. Abbey National uses the same 7.74% standard variable rate as it does for other borrowers.

Brokers who source loans from Mortgage Next can offer mortgages from Britannia subsidiary Verso with discounts of up to 4% for a year, although intermediaries add 0.2% on to the Verso standard 7.78% interest rate. Going direct to Verso gives lower discounts as well as a lower rate and no penalties beyond the cut-rate deal period.

Where you can save nearly ?400 a month

Interior designer Dawn Bowring was offered little choice when she bought her Somerset farmhouse a decade ago - pay through the nose or go without.

She took the first route and ended up forking out between 14% and 17% interest. But now she has remortaged through a self-certification loan, with savings of around £350 to £400 a month.

Dawn, 33, has always been self-employed. "I found no bank nor building society at that time who was prepared to lend me anything. They wanted audited accounts which I did not have; and to complicate matters, the house came with an agricultural tie - it could only be sold to a farmer. So I ended up with a loan from a solicitor at a rate that can only be described as extortionate," she says.

She paid each month on time - unaware of newer style loans that could save a small fortune.

"It's odd that banks know I can handle ludicrous interest rates but are sniffy about lending to me at sensible levels," she says.

Dawn only discovered better deals when she took a stand at a local agricultural show where a financial services exhibitor told her about self-certification loans from The Mortgage Business.

The process took six weeks and TMB is protected by its stake in a property that's worth around £750,000 including stables, outhouses, 15 acres and a lake.

"I could have produced five years' worth of audited accounts, but they do not reflect my real earnings as I've ploughed lots back into the business," she says.

Dawn, who lives with her husband and two children, pays TMB's standard 7.65% interest rate.