Dear Delia…

My client Mark is a qualified reflexologist who set up his own business 10 months ago. He would like to buy a £160,000 flat and has a deposit of £45,000, which is made up of savings and a lump sum from his parents. His business is doing well and he estimates his annual income to be £29,000. Mark has been turned down for a mortgage by his existing lender as he is unable to produce any accounts. Can you help?

Delia says: In the present climate, Mark should stress test his business before buying. Dave Symondson of Beacon Mortgages and Paul Winter of Ipswich look at his options. Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Intermediary response
Dave Symondson is managing director of Beacon Mortgages

Having been self-employed for only 10 months, your client obviously has no au-dited accounts.

Mark’s accountant will not draw up figures until after the end of his first year, which makes applying for a mortgage now a challenge – something he has already discovered given that his lender has turned him down.

Being self-employed, Mark has a much higher risk profile than someone in full-time employment and his only option is to look to self-cert lenders that consider applicants with less than 12 months’ self-employment history. There used to be a number of these but unfortunately, since the liquidity crisis the field has shrunk dramatically.

First National will consider such cases but Mark will be subject to a credit score. It offers a two-year fixed mortgage at 7.24% with a completion fee of £995.

Kensington Mortgages might also consider this case but is strict about fund allocation at present, so the deal would need to be booked to ensure availability. It is offering three-year fixed rates from 6.39% with a completion fee of £1,999. The early repayment charge is 5% for the fixed rate period.

Another option would be for Mark to get a full year of trading under his belt and then apply for one of the self-cert mortgages open to those with 12 months’ trading history. Ideally, he should get an accountant to draw up a preliminary statement of accounts as soon as the year is up so this can be presented with his application. This will widen his choice of lenders and products.

Putting the selection of products to one side, it should be remembered that Mark’s estimated income of £29,000 is just that – an estimate. He has no way of knowing if this sum will be achieved.

Reflexology is not as dependable an income source as, say, plumbing. Even in tough economic times, consumers need plumbers whereas reflexology is regarded as something of a luxury.

Get Mark to stress test his business finances. How would he cope if his business went into a downturn? Does he have high overheads that might turn a profit into a loss as a result of a small fall in sales?

Ideally, Mark should have some element of flexibility in his finances and his firm should be able to cope with a business slowdown.

Lender response
Paul Winter is chief executiveofficer of Ipswich

Few products still exist for self-employed individuals with less than a year’s worth of accounts.

While there were a handful of such deals at the start of the year, progressive withdrawals of higher risk products have resulted in this end of the market effectively closing for the time being.

Mark has little alternative but to wait a couple of months until he has a full year of trading behind him and this is not necessarily a bad thing. Property prices are falling in many areas, so the chances are that in a few months’ time, the flat he is thinking of buying will be worth less than it is now.

It goes without saying that Mark is in a strong position as the bull market of the past decade has passed. Buyers now have the upper hand and time is on Mark’s side.

He can negotiate a lower price when his 12 months have elapsed and until then he can deposit his £45,000 in a high interest savings account and benefit from the proceeds. I recommend our Premier 30 savings account, which requires 30 days’ notice of withdrawals to avoid loss of interest.

Once Mark has a year of successful trading behind him he will be eligible for a self-cert mortgage and despite the liquidity crisis, several are still available. But it should be noted that this applies only if he has little or no adverse credit. If he has significant adverse credit the picture changes and the selection narrows.

Although we don’t offer self-cert facilities to borrowers with only 12 months’ trading histories, building societies such as Leeds and the Yorkshire offer products that may suit Mark.

It should be pointed out to Mark that being self-employed means his income is not secure. When the economy is buoyant the self-employed tend to do well and they have significant tax advantages compared with workers paid by PAYE. But when economic times get tough, the self-employed feel the pinch first. This is because they often provide services that can be postponed or done without.

So can Mark afford a mortgage if his business starts to suffer? With your help, he should work out what his finances would look like if he saw a 20% fall in sales. He should also be reminded that if he goes ahead and buys the flat and then finds he can’t meet his mortgage repayments, reselling it at the price he paid for it can’t be taken for granted.

The fallback position in a rising market – that you can always sell a property at a profit – does not currently apply. Mark does not want to find himself in the position of missing mortgage repayments on a property that is falling in value. The phrase negative equity might not mean much to Mark at the moment, but it will to his parents.