The regulator should consider amending its regulations to help lenders deliver products better suited to self-employed borrowers, it has been suggested.
Data released this week by the Office for National Statistics revealed that the number of self-employed workers in the UK has surged to a new record high.
There are now more than 4.9 million workers across the nation who are their own boss.
But brokers have suggested there is still work to do on delivering the sorts of mortgage products that actually help self-employed borrowers.
Remortgage before going self-employed
James Mole, managing director of London Belgravia Wealth Management, noted that he always recommends that clients who are about to embark on a self-employed venture remortgage first, preferably onto a long fixed rate, in order to avoid the “massive stress” of trying to do so in the first couple of years after striking out on their own.
He continued: “The problem is lenders will generally want to see a minimum of two years’ accounts that show a good profit. This means they expect you to be profitable in year one. That is very tough to do. Some companies will take a few years to break even, let alone show a profit.”
The size of the market
Self-employed borrowers can make up a sizeable portion of a broker’s client base. Jane King, mortgage adviser at Ash Ridge Wealth Management, said that around one in five of her clients are now not standard PAYE employees.
And while advisers say there is no shortage of deals to choose from, that doesn’t necessarily make placing a case easier.
King said: “I can choose the same rates and lenders as with employed borrowers – it is meeting their criteria which is the more complex issue as they are very varied.”
Mole agreed that it wasn’t the size of the market that is the challenge, as most lenders will look at self-employed applicants.
“The issue is more around trying to find a lender that will accept one year’s accounts or that will look at the latest year’s profit instead of averaging out the last two,” he added.
Give lenders more freedom
Mole admitted he had some sympathy for lenders, noting that the regulator wants them to lend responsibly and they can only do this by offering deals exclusively to those who are making a decent profit “otherwise that’s a bad lending policy”.
He added: “I’d like to see the regulator change its stance first and allow lenders the freedom to make more innovative products that can better service this ever growing demographic.”
Offering higher income multiples
Paul Flavin, managing director of Zing Mortgages, noted that self-employed covers a broad spectrum of income types, but argued the core issue is how that income is assessed, which can dramatically restrict the choice available.
He explained: “For directors of limited companies, a handful of lenders will take retained profits while others show retained profits no consideration whatsoever. For those earning self-employed income as a second job then again, there’s numerous ways lenders will treat this. Some will take all declared as income while others will only take a percentage.”
Flavin argued that lenders could be more flexible when it comes to offering self-employed borrowers a more significant income multiple.
He continued: “If the self-employed person is offsetting as many qualifying expenses as possible then their real-time living expenses should be lower than that of an employed person, so why not take this into account and offer a slightly higher multiple, but only if the income is sustainable and constant?”
Clients feel persecuted
King said that some self-employed clients feel “persecuted” as they need to produce two years of accounts, whereas a PAYE employee can “get away with just one payslip”.
She agreed that it was difficult for lenders to relax their criteria yet still meet FCA rules on affordability, and noted that some lenders differentiate when it comes to self-employed professionals, such as lawyers and doctors, treating them “more leniently” as their income is likely to increase significantly over time.
“This is a good thing and we need more competition in this sector. I think more needs to be done for fixed term contractors on a daily rate – currently one or two lenders have an almost monopoly on this type of client,” King added.
Where lenders can improve
Brokers pinpointed a handful of lenders who are particularly strong performers with self-employed clients, and called on other lenders to adopt similar approaches.
King noted that when the client is a contractor she always goes to Halifax “as they generally sail through”, and noted that the fact the lender accepts one year of accounts for start ups makes them strong overall for self-employed borrowers.
King also pointed to Metro Bank and the smaller building societies as leading the way, noting that as the cases are manually underwritten you can discuss it directly with an underwriter, an approach other lenders could learn from.
Mole praised Halifax and Family Building Society. He said that they will both focus on the most recent year’s profit when determining affordability, which can make a big difference to how much clients can borrow.
Greg Cunnington, director of lender relationships at Alexander Hall, noted that while “long-term supporters of this market” like Clydesdale, Coventry Building Society and Virgin Money have used the net profit figure for limited company directors, others like Barclays and NatWest are increasingly doing so too.
“It has been great to see and opens up some attractive rate options for these clients,” he added.