Data from Mortgage Broker Tools released this week found that there has been a stark jump in the number of mortgage enquiries from self-employed borrowers who were unable to find an affordable option since the mini Budget last year.
The firm found that before the mini Budget, around a quarter (28 per cent) of enquiries from self-employed applicants did not secure the desired loan size, but this had risen to 37 per cent.
And intermediaries argued that the blame lay at the attitude of lenders towards these borrowers, many of whom were accused of being too prescriptive in the way they consider income and affordability.
Second-class citizens
It is clear that some lenders treat self-employed borrowers as “second-class citizens” according to Rhys Schofield, managing director of Peak Mortgages and Protection.
He pointed to the contradiction in certain lenders continuing to ask whether applications took out a self-employed income support scheme (SEISS) grant, yet “couldn’t give two hoots” about whether an employed applicant spent multiple months on furlough.
Austyn Johnson, founder of Mortgages For Actors, suggested that self-employed borrowers have been “penalised since day dot”, because lenders are unable to understand how their income works.
He explained: “Clients could be earning the same every year for the past 10 years, but if the latest three months don’t show the same income, it gets declined. Awful.”
Johnson argued that lenders need to spend more time “looking under the bonnet” of self-employed cases, and stop “streamlining” in order to provide fairer decisions.
A question of affordability
Graham Cox, director of SelfEmployedMortgageHub.com, noted that self-employed applicants face “strong headwinds” at the moment, particularly when it comes to affordability.
He continued: “Last week, we had to tell a client that, for various reasons, they could only borrow a little over two times their joint income. This is when most banks and building societies use a loan-to-income multiple of 4.5.”
Cox noted that there was still a reluctance among lenders to ignore the “Covid years” when assessing income, and he called for more lenders to work with the latest year’s net profit and salary figures for company directors.
“Many still average the last two to three years, even where profits are rising year on year. Or they use salary and dividends. Lots of company directors retain profit in the company and restrict their dividend payouts for tax reasons, so this works against them,” he continued.
How much can I borrow?
Justin Moy, managing director at EHF Mortgages, noted that the way that lenders assess what self-employed applicants can borrow can vary wildly.
He added: “A number of smaller and specialist lenders have taken a more positive approach, looking at the years before and after Covid to look at the realistic profit and turnover figures in normal years.
“Products from these lenders are more expensive than mainstream lenders, but the borrowing capability can be as much as double the amount high street lenders will offer.”
Samuel Ewen, managing director of Rosehill Financial Services, said he had seen criteria changes which have had a negative impact on self-employed clients, who he argued “already have it hard enough”.
“For example, we had a lender in mind for a case recently and were then given the heads-up that the particular lender was changing their criteria to no longer allow for company net profits to be used, which then heavily reduced the client’s maximum lending figure with that lender,” he added.
Ewen agreed that it is mainly on the assessment of income where things get tough, with the maximum mortgage amount varying “significantly from lender to lender”.
Difficulties are overblown
However, Mike Staton, director of Staton Mortgages, suggested it was a “big myth” that it was harder for the self employed to obtain a mortgage.
He said: “Any mortgage is difficult to obtain if you have unrealistic expectations or you aren’t declaring and earning the correct amount.”
This was echoed by Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, who said he had not seen “any particular tightening” of lending for self-employed borrowers.
He continued: “What we are seeing is more and more lenders offering improved affordability for certain market sectors. For example, Hodge has recently joined a small number of lenders with improved affordability for certain professionals while Kensington has special deals for ‘heroes’, for example the armed forces, the police, fire service workers, NHS staff and teachers.”
