Lenders’ attitudes towards Self Employed mortgage deposits have shifted somewhat in recent years. Just ten years ago, it wasn’t unusual for lenders to offer mortgages for up to 100% of the property value and, in certain circumstances, some companies even offered lending over 100%. The financial crisis of 2007–2008 – which had its roots in the subprime mortgage market in the US – drastically changed lending attitudes: 100% mortgages disappeared from the market practically overnight, and lenders began to demand higher deposits to limit their exposure to risk.
Since then, the wider economy and the property market in particular have had a few years to bounce back, and it gradually became easier to source mortgages of up to 90% loan-to-value (LTV). More recently, the government’s various Help to Buy schemes have seen positive moves to make 95% mortgages more readily available to homebuyers. However, the nature of the current mortgage market means that there are still pressures – and advantages – to putting down a bigger deposit. At the time of writing (October 2016) the average house price in England is £236,000 and the average deposit is £55,000 – around 23%.
Factors that can affect your maximum LTV
Each lender has a different attitude to risk, which tends to be based on their previous experience of lending and, specifically, which types of borrower are most likely to default on their mortgage payments. This can mean that rather than a blanket maximum loan-to-value ratio that applies equally to all mortgage applicants – for example 90% or 95% – you might find that different LTV limits apply to different types of customer that they may perceive as higher-risk; rightly or wrongly, this can include the self-employed, contractors and freelancers.
Other factors, such as your credit score, can affect the maximum mortgage LTV you can get – if you have a poor credit history the lender is much more likely to require a larger deposit. By limiting the lending compared to the value of the property, the lender minimises their potential exposure to loss in the event that the borrower defaults on the mortgage and the property has to be repossessed and sold. You may also find that at higher LTV ratios the lender imposes absolute limits on the total mortgage size – for example, an upper lending limit of £500,000 on 90% mortgages.
Mortgage products and bands
Lender-imposed LTV limits aside, the nature of the mortgage market means there can be positive advantages in putting down as large a deposit as possible. Each individual lender can have numerous different mortgage products available, and these are usually grouped into tiers or bands depending on the percentage deposit and LTV – in short, the bigger the deposit you can put down, the better the mortgage deals you’ll be likely to qualify for. This will of course vary from lender to lender, but here is a typical example of the types of bands and interest rates you might see on a freelance or contractor mortgage:
- 44% 5-year fixed rate for lending up to 75% LTV
- 54% 5-year fixed rate for lending up to 80% LTV
- 84% 5-year fixed rate for lending up to 85% LTV
- 54% 5-year fixed rate for lending up to 90% LTV
*Rates typical as of October 2016
When looking at mortgage rates and products, it’s a good idea to think strategically about the size of your deposit and how the products and rates are banded. For example, if increasing your deposit by just a couple of thousand pounds will push the borrowing into a lower LTV band, it could mean qualifying for a better rate and paying less interest on your total mortgage borrowing for the first five years of your mortgage based on the rates given above.