Understandably banks are focusing on how to safely underwrite mortgage applications from self-employed borrowers during the pandemic, which brokers say has led to several “knee jerk” decisions on how to assess cases. But intermediaries are looking further ahead, concerned about how lenders will treat the already underserved group a year from now.
Writing for Mortgage Solutions, Bob Hunt, chief executive of Paradigm Mortgage Services, said it could take some months before lenders returned to their normal self-employed lending policies.
After that, Hunt said the big question would be how income earned during the Covd-19 crisis would be viewed by lenders in the future.
Several intermediaries shared Hunt’s concerns.
Chris Sykes, mortgage consultant, Private Finance, said: “We may see self-employed people unfairly discriminated against in the future unless banks adapt to a post-Covid lending situation.”
The lockdown has wreaked havoc on businesses that have been forced to stop trading during the lockdown.
Desperate for support, more than two million self-employed workers in financial difficulty because of the pandemic have applied for a government grant worth up to £7,500 since the scheme launched last week. Chancellor Rishi Sunak said the value of grants totalled £6bn so far.
Mortgage and equity release broker Jane King, Ash-Ridge Private Finance, said: “The tax year 20/21 may produce some awful sets of accounts for some businesses. And although some may be able to rebuild some earnings this year, what’s happening now is going to catch up with them down the line, which is worrying.”
Banks’ duty of care
With such overwhelming evidence that business owners are struggling to stay to afloat during the lockdown, brokers say it is unsurprising banks have moved swiftly to change their lending policies.
Nick Morrey, technical director John Charcol, said: “Many self-employed people will be suffering what is hoped to be a short-lived but significant reduction in income and that means potentially reduced mortgage affordability. This is disappointing for self-employed borrowers, but lenders have a duty of care not to lend irresponsibly. Where reduced income is evident they would be wrong to ignore such evidence and lend high amounts.”
Halifax, for example, said it will now refer self-employed applications to its underwriters. The lender will be looking at the track record of the firm, the stability of the sector it operates within, cash flow and the likelihood it will return to normal profitability in the future.
NatWest said last week it would use the lower of the average last two-years’ net profit; the most recent year’s net profit, or the confirmed government income support amount, which ever is the lowest.
Morrey added: “Understandably lender reactions have not been uniform, they have their own approach to looking after themselves and their customers. But we have seen some lenders request three months business bank statements as an additional requirement to see what state the business is in at the moment. This looks like a knee-jerk reaction as many businesses have highs and lows over the year.
“Also, banks do not ask for business bank statements for an employee who is applying for a mortgage to check whether or not their employer’s business is in good financial shape.”
Earnings recovery
Judging a self-employed applicant’s long-term affordability on a snap shot of their business during an unpredictable and universally-felt health crisis is problematic, say brokers.
The last few months may reflect a period of inactivity. But out of those who are employed and those who work for themselves, mortgage experts are placing their money on the latter to financially pull through this pandemic the quickest.
John Phillips, group operations director at Just Mortgages and Spicerhaart, said: “Any dip in income is likely to be taken into account by lenders. However, the advantage that many self-employed people have over the employed is that they can work more flexibly following these challenging times in order to make up their income, working longer hours or weekends.
“Take self-employed builders, for example, many of whom are now working six day weeks in order to make up for lost income over the past two months. People in this situation will therefore see a short-term blip in their income, but long term they may well be able to make this up.”
Future borrowing
The increased use of an accountant’s certificate, which would reflect the earnings of the tax year in which the application was being made, has been mooted as a solution to underwriting future applications.
Sykes said: “Perhaps banks will increase their reliance on accountants’ certificates. If the accountant says the income is going up , maybe banks will be prepared to base their lending on the current year’s figures which are a bit higher.”
But some brokers warn that accountants certificates are not easy to come by in today’s mortgage market. King said most accountants will refuse to provide an income forecast, unless there are 10 or 11 months’ figures available.
When underwriting future mortgage applications, if the 20/21 accounts are required as proof of income, Phillips wants lenders to take into account a borrower’s track record if it shows that prior to the pandemic the firm was trading at a healthy level.
Brokers understand that banks have a tough job on their hands assessing the risk of lending to self-employed borrowers.
But they hope lenders’ fleet of foot response to changing criteria during the pandemic will be the same when they need to adapt to facilitate lending 12 months from now.
