Of the 1.1m more people in work in April to June 2014 compared with January to March 2008, 732,000 were self-employed.
But the availability of mortgage products designed specifically to suit the needs of entrepreneurs has significantly diminished over the same period.
We asked our panel of experts to tell us what product and criteria innovation they want to see from lenders to improve the accessibility of mortgages for self-employed borrowers.
Mark Dyason, director at Edinburgh Mortgage Advice Brokers, wants to see greater flexibiity around proof of income and common sense when it comes to accounts nuances.
Ashley Brown, director at Moneysprite, says lenders must address the unfair treatment of the self-employed or risk creating a wider economic problem.
Chris Duder, associate at Anderson Harris, wants to see lenders take a more holistic view of a income and expenditure instead of forcing them through the same affordability calculation as an employed applicant.
Mark Dyason is director at Edinburgh Mortgage Advice Brokers
With 15% of the workforce now self-employed it is time to look at what mortgage facilities are available to support this sector of the workforce.
For the employed, far fewer checks are carried out and their cases are simpler, but the contradictions which exists between underwriting and criteria between them and their self-employed counterparts needs to be addressed.
A client with a fast growing business, increasing profits and investment will be declined because of a small negative asset and liability. But the new staff hired with a six month probation period in the same business will be approved.
The issue seems to be that self-employed cases require more manual underwriting and so take longer.
The demise of self-cert is mourned by few, but where are the risk-weighted products which offer self-employed clients a lower loan-to-value mortgage with more flexibility around their proof of income such as an accountant’s reference? Is this too far? I think it will come.
The SA302 is the self-employed person’s P60, so let’s use this as such. Three years’ history of level or increasing earnings should be enough to show ability to pay far better than three months’ pay slips.
For sole-traders it would be useful to be able to declare which credit is run in a client’s personal name and what is an actual business cost to stop double counting against affordability.
What I propose is simplification of the criteria. Smaller and new entrant lenders should look at this sector as an opportunity to underwrite smarter and offer niche products which would take top quality business away from the big boys who can’t see it as such.
Ashley Brown is director at Moneysprite
The self-employed workforce is growing quickly in the UK, as people react to the economic climate of low wage inflation, and under-employment. A strong entrepreneurial spirit is coursing through the veins of many, who have used redundancy payments or the recession as an opportunity to forge a new career path.
But are mortgage lenders keeping up with demand from the self-employed sector?
In the main, I would say no. Most lenders still use underwriting criteria that unfairly penalises this sector. An example would be given the same credit score and multiples (we are using these again according to the BoE right?) company directors will often be severely restricted, especially if they chose not to draw their full share of net profit.
There are exceptions though. A big well done to Virgin and Coventry for their enlightened approach to this. They allow a prudent approach to running a business instead of making business owners pull every penny each year, just to secure a mortgage. Others lenders should take note.
A second example where innovation would be welcome is the length of time a person is required to be self-employed or running their own business.
Demonstrating affordability and a track record requires totally different standards between the employed and self-employed sector.
An employed applicant may be agreed after one month in a totally new career. But the self-employed applicant would need two or three years proof of success, even if they have been previously employed in the same sector. Especially in the instance of professionals, such as surveyors, doctors and dentists where self-employed contracts are commonplace, the number of lenders open to this sort of business is remarkably low for the newly self-employed.
Trying to square the circle between a more risk adverse post-MMR lending environment, and a growing sector of the work force who want to control their own career destiny, may not be easy. However, to unfairly limit this sector from home ownership and remortgaging will stifle innovation and progress in the wider economy, if it deters people from “going it alone”.
Chris Duder is an associate at Anderson Harris
One of the main frustrations for the self-employed mortgage applicant is the length of time they have been trading.
If they have less than three years of accounts, only a limited number of lenders will consider them.
Some banks will lend to those with one year’s accounts if their previous employment was in the same line of work. This makes sense as someone may have been in the same business for years but be changing from an employed to a self-employed position. It would be good to see more lenders take this commonsense approach.
Another issue for the self-employed is retained profits in a business. An accountant might advise their client to leave their profit in the business if they do not ‘need’ the income but most banks will ignore this when it comes to the mortgage application.
One or two will consider it as income that is available to the client should they choose to draw it but more lenders should do so.
Those self-employed clients who are members of a Limited Liability Partnership, with a guaranteed monthly drawing and annual profit share, may have no access to the company accounts but find that a lender will want to see them.
Again, one or two banks will lend to such applicants but it would be helpful if more lenders were flexible.
Generally speaking, it would make life easier for the self-employed if lenders took a more holistic view of the situation around income and expenditure and their business, rather than putting numbers into an affordability calculator.