There is no doubt that the growth in self-employment in recent years has encouraged employment flexibility but it can be challenging when looking to refinance property. When the main source of income is from self-employment many mortgage providers will err on the side of caution. Presenting combined partner incomes in the best light to maximise funding requires a focused approach with intense attention to detail. The market may be softening towards self-employment but it can still be challenging when there are other issues to take into consideration.
We were recently approached by a couple looking to refinance their home, raising equity to fund an extension. Initially they had planned to purchase a new property but on reflection decided their existing property could be adapted to accommodate their future family requirements. The proposed LTV was not onerous but the devil was in the detail with regards to their source of income, credit rating and a rather challenging marker on their credit file.
As we touched on above, maximising funding using self-employment income is challenging to say the least. These particular clients also had a fairly poor credit rating which was certainly an added hurdle. However, the main issue was a CIFAS marker placed on the client’s credit file due to an overcautious bank suggesting involvement in fraudulent activity. Even though the clients were cleared by the police, and no action was ever taken, the marker would remain on file in the short term. This was out of our control ….
This is a very grey area with regards to the UK credit rating system and one which is proving extremely difficult to change. While appreciating finance providers need to be aware of the “wider picture” many will find it difficult to understand why the marker remains when the clients were investigated and declared innocent by the police.
So, the basic scenario was as follows:-
Client: Husband and wife
Husband’s employment: Self-employed IT specialist
Wife’s employment: Salaried medical professional
Property value: £1.25 million
Funds required: £857,500
Proposed LTV ratio: 68.6%
Purpose of funding: Refinancing and equity release for renovations
On the surface it looks like a fairly straightforward refinancing which would release equity for renovations. When completed the renovations would increase the value of the property, creating the option for an enhanced remortgaging further down the line. In our industry we appreciate that the devil can be in the detail which in this particular scenario unearthed a number of substantial challenges. We have the self-employment status from the main income source, a poor historical credit rating and then there was the fraud marker on the client’s credit file. While unjust and unfair, there was no way we could remove this in the short term although it was due to expire within two years.
So, we were fully aware of the client income, background and the challenges ahead. The key to securing finance even in challenging situations is to address each component individually and find a mortgage provider able to see the wider picture.
Issues to address
When it comes to credit ratings and in this scenario a fraud marker, traditional mortgage providers offer very little in the way of flexibility. It was therefore fairly obvious that we would need to negotiate with private banks/niche lenders to secure finance. Unfortunately, while the self-employed community continues to grow rapidly across the UK in many ways the mortgage industry has failed to keep pace. As the self-employed income stream was the main source of income, it was very important to find a mortgage provider willing to consider the client’s “day rate”. This reflects the value of the contract going forward and can be very different to the historic figures quoted on the SA302.
While the elements of this particular case study are not uncommon it is fairly rare to see them appear in one fundraising exercise. Even though there was evidence to show that the fraud marker was “unfair” even the additional challenges in isolation would mean a relative premium on the headline mortgage rate. One of our many roles in fundraising exercises is to inject a degree of competition amongst potential lenders so we can negotiate the best possible terms.
In summary the issues to address were as follows:-
Main income: Derived from self-employment
Credit history: Fairly poor
Fraud marker: Unjustly added to credit file
LTV ratio: Approaching 70%
Even though we have noted the LTV ratio as an issue to address, this is simply as a consequence of the client’s credit history and unjust fraud marker. The LTV ratio would be towards the top end of a traditional vanilla fundraising but is even more challenging in the circumstances described above.
As an independent mortgage broker we are in no way tied to individual parties, or groups of lenders, and have full access to more than 300 different sources of finance across the globe. This is invaluable when looking to inject a degree of competition amongst potential lenders especially in challenging scenarios such as this case study. It is imperative from both a time and competitive angle that we quickly recognise which lenders may be able to accommodate the client’s funding requirements. The next step is to present their income and their scenario in the best possible light to maximise funding. Challenging, yes, but these are the scenarios in which we thrive.
After approaching a number of suitable mortgage providers, and injecting a degree of competition, we were able to secure finance for the clients. As we were able to prove the client had no involvement in the alleged fraud, police records confirmed this, this was not a deal breaker although it did influence the headline interest rate. The eventual lender was also comfortable working with contractors and those with adverse credit histories.
The exact details of the funding solution were as follows:-
Funding partner: Specialist lender
Property value: £1.25 million
Total funding: £857,500
LTV ratio: 68.6%
Finance rate: 3.99% fixed for two years
Funding duration: Short-term
We were extremely pleased to negotiate a very competitive rate for the clients when taking into account the background scenario and income streams. The key was the fact that by the time this short-term arrangement expires the CIFAS marker will have been removed from the client’s credit file. This will allow refinancing of the property on more traditional terms, using the enhanced value, resulting in a lower LTV ratio. In many ways this perfectly illustrates the use of short-term products as a means to an end.
What can Enness do for you?
There are few scenarios we have yet to come across with regards to property finance, refinancing and redevelopment. The subject of credit histories and credit files are obviously a major consideration for lenders. Interestingly, while the mortgage sector continues to develop and adapt to the modern world, some would argue that the credit rating system is still relatively archaic, overcautious and in some cases plain unfair. This case study also takes in the issue of self-employment and maximising income streams to achieve the desired levels of finance. By definition, self-employment income can be volatile and difficult to predict, with lenders preferring to err on the side of caution while borrowers look to highlight their maximum potential.
While fairly rare, it is not inconceivable that you may find yourself in a similar situation to the clients in this case study. If that is the case we would welcome the opportunity to discuss your funding requirements in more detail and take an in-depth look at how we may maximise your financial resources. While we offer more traditional mortgage services we are specialists in bespoke finance structures which are shaped around an individual client’s current situation and future potential. We are able to put together a number of possible solutions for you to consider. These are based on real-time market rates allowing you to compare and contrast cash flow as well as short, medium and long-term financial liabilities. We are acutely aware that while maximising funds available this needs to be done in an environment which does not overstretch your financial resources.