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MORTGAGE CASE STUDY: self employed

Mary and Stephen Casey

• Steven Casey is a self-employed plumber aged 30. He has been in business for 4 years, prior to which he worked for a large local contractor. The business is financially buoyant and growing gradually.

• Steven is married to Mary and they have two young children. Mary is a qualified accountant but has deferred progressing her career until her youngest child starts school. She does not think it will be difficult to find a suitable job. In the meantime, she helps Stephen with the books for his business.

• They live in a rented flat at the moment, but have decided they want to buy a house. They like the look of this one, which is currently vacant.

Age : Built 1973 Tenure : Freehold Type : Detached bungalow Location : Rural Utilities : Mains water, electricity, no gas Road : Made up fully Alterations : Garage added 1986 Accommodation : 2 reception rooms, 3 bedrooms, 1 bathroom/wc, 0.15 acre site, floor space 1,100 square feet, brick construction with tiled roof. Usage : Residential Essential repairs : Part finished extension, causing present exposure to weather. As the property is a repossession, the work was abandoned. Early attention to this work is essential. Current value : £200,000 Insurance value : £220,000

• Steven anticipates that when he has completed the extension and various other ideas he has, the value could rise to £250,000.

• Steven and Mary clearly have questions to ask, some of themselves (e.g. Will the rural location be suitable for the children as they become of school age?) and some of their surveyor (e.g. Has exposure damaged the extension?) These are practical considerations which only they can resolve, but some of which may have more impact than others on their course of action.

  The purpose of this study, however, is to provide some indication of the thinking going on in the mind of the person who might be considering a loan application. Bear in mind that whilst most lending organisations have guidelines to help their staff determine loan agreements, the final discretion is often exercised by another person.

  Before moving on, can you guess at some of the information that the lender will need? Imagine that you are the lender, and need to assess a loan application.

  The following are some of the more important points that need to be satisfied. Often, these queries uncover other points that need to be answered also.

1. What information will you need from Steven and Mary to determine how much they can borrow (the maximum sum is called their ‘borrowing ceiling')?

   As the lender you will need to see: a business plan for Steven's business, if he has one; three years accounts prepared and signed by a qualified accountant; if three years accounts are not available, as many accounts as are prepared together with projections drawn up with the assistance of an accountant; certification that schedule D taxes have been paid in full; details of other income; details of outgoings and current debts; other relevant factors under the headings of income, expenditure, assets and liabilities.

2. How would you check the accuracy of the information they give you?

   The information could be corroborated by checking Steven's business accounts in detail and asking relevant questions of the accountant (the applicant's permission is required for this). Bank statements should be sought to identify cash flow and seasonal variations. You should run a credit check with a recognised bureau. References can be taken as required from landlord, bank, business suppliers, other loan sources.

3. What are the main risk factors associated with these particular borrowers?

4. What are the main risk factors associated with the security offered and what constraints could you put in place to reduce or eliminate these risks?

   Borrower Security The applicants are first time buyers and so have no track record to date. The business is apparently successful and has got over the initial few years, generally the most vulnerable. Self-employed status implies general lack of security. The plumbing business is dependent to some extent on the well-being of the construction industry. The business may be subject to seasonal fluctuations. There is no guarantee that Mary will actually return to work, so potential earnings should be ignored. The property is rural, so access is important. Proximity to local amenities may be a factor influencing value. It is also a repossession, which would affect short term perceptions of value. Is the garage, which was added subsequent to construction of the dwelling, fully compliant with local authority planing consents? The unfinished extension is a major work which will require resilience to complete, as well as additional funding. If unattended, this could affect the property value adversely within a short period of time. Also query as for garage. It is likely that, as a lender, you will insist on a retention, holding back the cost of the work to be completed pending final inspection of the finished job.

   
   

5. As Mary is a potential high earner, would you take her future income into consideration in deciding on the amount to be advanced?

   No - Mary's possible income should be discounted for the purpose of this application. It could be considered for future loans, however, once she has actually returned to work.

The purpose of all these queries is not to make it difficult to get a loan, merely to ensure the security element for the lender. Once you know what information is relevant, it could make it simpler for your applications by having the necessary information – and balanced expectations of the outcome – ready. Be prepared!

One final point. Before finalising their mortgage Steven and Mary should be given certain information required under the Mortgage Conduct of Business (MCOB) rules.

REMEMBER You should not use any information contained on this page as the basis of any action until you have discussed matters with your financial adviser.