It’s not just tax returns that have troubled the nation’s 4.77 million self-employed in recent times though. It has been a common complaint that mortgage lenders have been behind the times in adapting their criteria to fit the needs of the self-employed, significantly reducing their borrowing options.
Research from Nottingham Building Society last year found that 12% of self-employed borrowers have been turned down for a home loan in the past.
Martin Stewart, director at London Money, said he has long felt that the market treated those working for themselves unfairly.
He says: “There should be no need to penalise anyone on rate, just because they have decided to take control of their own destiny. There is no such thing as job security anymore with more jobs being outsourced to contractors, freelancers and overseas cheap labour. Throw in the surge in zero hours contracts and technology advances and you could argue that those working for themselves have greater job security than the employed.”
Perception vs reality?
But how much of an issue is it really? Jeni Browne, head of sales at Mortgages for Business, argues that while mortgages for self-employed borrowers are perceived to be harder to come by, or subject to additional requirements, the reality is that this is not the case.
She continues: “The only thing that can be confusing is what actually counts as income, as some lenders differ on this point. Some borrowers believe that their income is their turnover, but that’s not what lenders use. It’s all about the taxable income – the profit.”
Peter Rogerson, commercial director for mortgages at Virgin Money, says that this misconception means that brokers are sometimes too quick to assume specialist lenders are the only option.
Adrian Anderson, director at broker Anderson Harris, says that most banks simply rely on the borrower’s SA302 or personal tax returns, but challenger banks take a more flexible approach.
He continues: “For example, for a majority shareholder limited company director Metro will usually consider the company accounts and if there is retained profit within the business this will usually be taken into consideration when calculating income.”
Aaron Strutt, director at Trinity Financial, says that while specialist lenders have become a popular option for self-employed borrowers, the truth was that the majority now fit perfectly well within the criteria of high-street lenders.
He continues: “Most clients are conscious about the rates and fees they pay and would rather go through one of the larger lenders if it’s possible. Some of the specialist banks can be more creative with their underwriting, and they provide alternative options from the mainstream lenders.”
Browne says that a number of lenders have established themselves as strong players among self-employed borrowers, including Virgin Money, Clydesdale Bank, Kensington and the Coventry Building Society.
Should one year’s accounts be enough?
Nonetheless, there is still room for improvement. Browne says: “There are very few lenders who will lend to someone with less than two year’s figures, so it would be good for a few new entrants to come in lending to those with one year’s books.”
Only time will tell if lenders do opt to pursue that path. It’s worth remembering that this is an area that has concerned the Financial Conduct Authority in the past.
Speaking at the Mortgage Business Expo 2016, Lynda Blackwell, mortgage sector manager at the FCA, questioned the decision some lenders had made to accept just one year’s trading records, warning that it did not want to see self-employed mortgages become “the new self cert”.
She added: “Is one year’s accounts enough to establish an ability to repay a mortgage? There are differing views on this, but it will depend on the quality of the underwriting, so affordability is absolutely key. We look at these developments happening and we worry about a slippery slope.”