Despite the gradual reopening of businesses as lockdown eases and more lenders pushing up the loan to value curve (LTV) to 95 per cent, self-employed borrowers are still seen as risky business.
According to the latest Mortgage Solutions poll, some 61 per cent of brokers said the mortgage outlook was not improving for homeowners who worked for themselves, while 22 per cent said they thought it was.
Santander was applauded by brokers for changing its lending policy to discount the 20/21 set of accounts for self-employed borrowers who have suffered an out of ordinary loss of earnings. But the other big banks said they did not plan to do the same.
NatWest is reviewing its current policy that excludes borrowers who have applied for a Self-Employment Income Support Scheme (SEISS) and Barclays is also believed to be looking at its current rules but neither have indicated they will adopt Santander’s approach.
Nick Morrey, product technical manager, John Charcol, said: “Santander is holding a blazing torch for the self-employed.
“Most lenders look at the latest two years accounts. But the 20/21 year could look pretty shocking, however, it would be a blip on an otherwise normal record with HMRC.
“By ignoring that year and taking off any commitments for government assistance the bank is practising responsible lending. Looking at 19/20 accounts and current business bank statements is a huge leap forward compared to how underwriters have been forced to ascertain affordability for the last ten years.”
Because lenders use the average earnings from the last two years accounts, the pandemic stricken tax year of 20/21 will still be hampering borrowers’ mortgage applications until 2023 unless lenders rethink their policies.
Currently, the 20/21 accounting period is not required by most lenders as they are still happy to work from 19/20 as the latest accounting year. But that will change as the year progresses says Morrey.
“This situation will start to bite in quarter four,” he said. “At that stage lenders will start to say that the 19/20 accounts are too old to rely on and so 20/21 accounts will start to be requested.
“We are hoping to see other banks take a pragmatic view of the plight of the self-employed before Q4.”
Simon Butler, head of mortgages at self-employed specialist CMME, said his recent talks with lenders have indicated a willingness to relax underwriting policies for self-employed borrowers but lenders are being tight lipped about when changes will be implemented.
Despite Santander’s decision to disregard 20/21 accounts, its LTV for self-employed borrowers remains conservative at 75 per cent.
Morrey says until other lenders adopt a similar income policy to Santander, the bank is unlikely to raise the LTV limit.
Nationwide, meanwhile, has no plans to relax its rule around contractor income.
Before the pandemic, the building society used 80 per cent of the annualised day rate. This was pulled back to 50 per cent and there are no plans yet to revert to the original calculation.
Butler said CMME was placing more than 300 cases a month with Nationwide before it curtailed its income policy. Now they rarely use the lender.
An obstacle facing many of his contractor clients is not a specific self-employed issue, said Butler. Instead it is a tightening of credit scoring in the higher LTV bands that was stopping deals from progressing.
He said a lot of borrowers who are self-employed prefer to take a higher LTV mortgage than use up all their savings getting together a bigger deposit. But securing a high LTV mortgage was proving tough.
“Although lenders are presenting options in the high LTV bands there is a lack of appeal to lend in this part of the market so credit scoring is very restrictive,” he said.