Speaking to Mortgage Solutions, Anthony Rose, chief executive at LDNfinance said: “I think it’s probably the area above all others on the normal mortgage space where brokers can really add value, and where, as an industry, we cut our teeth and also have a big influence on the lenders.”
He continued: “I think it is an area that growth is here to stay, and it’s an area that brokers need to upskill themselves on because I think if the understanding is there and you spend the time on the case, then there is a is a large source of business there.”
He said understanding that self-employed get paid on an irregular basis, have lumpier tax bills twice a year and that their income was varied was vital.
Rose continued that giving additional advice, such setting up a rainy-day fund to cover the mortgage in lean months, was also important.
Additionally, having a breadth of understanding when it comes to lender criteria was also crucial, especially as they frequently changed.
Rose added that the self-employed had a “greater need for protection and life insurance” as they did not have access to the same benefits as those in full employment.
“I think as a business model, there is often more long-term value in a self-employed client than there is necessarily in an employed client,” he said.
He noted that from a lead generation perspective, it was an area which did not need to be targeted explicitly.
Rose said: “I think there is an element of even if you don’t target it directly, it comes because self-employed people by definition need to use brokers. Almost in every case I would expect to be honest.”
He added that there was significant referral business as well.
Rose said self -employed clients made a “disproportionately high amount of its business” with around 30 per cent of its business coming from these individuals.
‘Massive disparity’ in lender income criteria
Rose said there was a “massive disparity” between one lender and the other from a criteria perspective, especially when it came to viewing income for self-employed.
He said using net profit or projections over the next few years, as opposed to just salary and dividends, could potentially double or more than double the borrowing amount a self-employed client could access.
However, Rose said: “Without any shadow of a doubt, both for the lender and the broker, it is a lot more labour intensive.”
He said establishing self-employed income could require 20 documents and take two or three hours of work to “come up with the right outcome”, as opposed to PAYE which could take “three seconds”.
Rose added: “Often there is no exact outcome because there’s so many ways of achieving the figure.”
He continued that it separated brokers who were “willing, able and capable of doing that business from those that are not” and said this was the same for lenders.
Rose that lenders who used net profit and projections, along with a “wider holistic approach” would “win a lot more self-employed business” but they would charge higher fees.
Attitudes to SEISS grants and other government support
Regarding Self-Employed Income Support Scheme (SEISS) grants and other government support, Rose said it was “still working its way through… to a large extent” as some people who had taken out such support may not yet be looking for a mortgage or updated their accounts.
Reports during the pandemic showed that some mortgage lenders declined self-employed borrowers as they had taken out SEISS grants or other forms of government support.
“I think part of the problem around that is still to come out in the wash,” he said.
He explained that there were some lenders who were more “rigid” in their approach, so as a broker you wouldn’t initiate a conversation with them.
Rose said some lenders were more “prepared to take a much more manual underwriting process” which he said gave brokers more confidence in “getting the right outcome”.
Professional and high-earning self-employed
He added that LDNfinance typically focused on higher earning or professional self-employed like doctors, barristers and dentists, but there was a challenge as larger numbers were involved.
He explained: “Banks are more wary, and you can get a much bigger disparity. If you were a barrister who earned £400,000, it’s not unreasonable that if a few different events happened the next year, you could go down to £150,000, which is still a very good income but a huge way away from the higher level.”
He explained there was a “bigger duty of care” to understand their situation as if these kinds of borrowers had varying income, it was “not going to stop them wanting to buy the house they want to buy”.
Rose said: “It is a case of working out that it may be a stepping-stones stone solution based on the reality that you are very credit worthy, you are a professional and your income for the previous 10 years has been amazingly consistent, but in the last 12 months, there has been a dip.
“We need to accept that and deal with it in this mortgage application with a view that in two years’ time when we look to refinance, that will have come out in the wash and then we’re in a position where we’re back to the figures that you were previously looking at.”
He said most lenders who targeted the self-employed sector wanted to work with these kinds of professionals and would view the income sustainability in a “different light” compared to more manual self-employed professions.