Time to prove your worth

The self-employed have found it hard to get mortgages because of the need to provide three years' accounts, or similar documentation, to prove their income.

With changing trends in employment, however, high-street lenders have become more sympathetic to self-employed borrowers.

Brokers say there is a popular misconception that, if you are self-employed, you have to go for a different deal, but the key is whether you can prove your income. If so, you can get the same deal as an employed person on a status basis.

What constitutes satisfactory proof of income depends on the lender. Many high-street lenders allow self-certification, where they accept a statement of income signed by the borrower, without requiring any evidence that the amount is correct.

The latest convert here is Britain's biggest mortgage lender, the Halifax, which two months ago started allowing self-certification for existing customers, where the loan-to-value (ltv) is 75% or less. They still ask for back-up documentation such as bank statements. A higher ltv - a smaller deposit - requires an accountant's letter.

Other lenders, however, still insist on seeing audited accounts. Generally, the lower the total amount loaned, the less rigorous the demands.

But if you have to produce accounts, what do you do if your accountant has skillfully minimised your profit for tax purposes?

Many lenders work on the basis that you earn more than you say you do in the accounts so they may well accept that it is appropriate to state your income as being a few thousand more than it is for tax purposes.

This can also apply where the borrower owns a limited company, which both pays him a salary and produces a profit, which effectively belongs to him as well. Again, many lenders will take both figures into consideration.

In contrast, the Bank of Scotland offers a special status mortgage without requiring an income figure but your accountant must confirm how long your business has been trading, and that it is still going. With this arrangement, the bank can lend up to 80% ltv with a maximum loan of £300,000. Borrowers able to produce accounts could borrow up to 100% on a property. But the bank would take the borrower's income as being the net profit on the accounts, rather than some higher figure.

Just because you may not have to prove income, however, does not mean you will not have your credit rating checked. Some high-street lenders will ask for references from your existing mortgage lender, if you have one, and this will probably highlight any past or current arrears. It is not always necessary to have a squeaky-clean record.

"While you can't make generalisations, if you've missed one or two installments, you'd probably be OK," says Simon Pistell, managing director of Legal & General. "On the other hand, if you're six months in arrears that would be more of a problem."

Generally speaking, the first port of call for the self-employed should be the mainstream lenders, because you may be able to get a mortgage on the same terms as someone who is employed.

Failing this, a tailored product might be an option, though these tend to have relatively conservative lending criteria, with the maximum advance available normally 75%. And interest rates might be slightly higher than mainstream mortgages.

Legal & General is one of around 20 providers offering a product designed for the self-employed. Their Flexible Reserve Plus mortgage is an Australian-style loan that allows you to overpay or take payment holidays, and pay in lump sums or take money out, as long as you have built up enough of an overpayment.

The current interest rate on this mortgage is the same as on Legal & General's other products - 6.8% - but borrowers are not eligible for the new borrowers' discounts.

Finally, there are the lenders who specialise in mortgages for people unable to get finance from other sources. These include the Kensington Mortgage Company, RFC MSL, Platform Home Loans and Future Mortgages, and they usually get business via brokers.

One of the reasons they can offer finance is because credit risk is assessed on a case-by-case basis by an underwriter, rather than by computer, which happens with many mainstream lenders. But rates are likely to reflect the higher assumed risk, at least for a few years.