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Self-employed mortgage choice has improved but under-served areas remain – analysis

  • 08/05/2024
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Self-employed mortgage choice has improved but under-served areas remain – analysis
Self-employed mortgage borrowers face an even tougher set of challenges in a cost-of-living crisis and high interest rate environment than their PAYE counterparts when it comes to getting a mortgage.

But self-employed mortgage product choice and lender support are strong, say brokers, putting today’s market back on a par with pre-pandemic conditions.

Homeowners who work for themselves not only have their own rising bills and interest rates to manage, but some must deal with their customers cutting back on how much they spend as budgets get tighter.

Jon Cooper, director of mortgage distribution at Aldermore, said: “Plenty of people have been cutting back on anything that’s not essential. If you’re self-employed and run a business such as a florist, a coffee shop, or sell luxury goods, the current economic conditions might see your business stutter as people rein in their spending. Naturally, if your income is irregular and in recent months has declined compared to the year before, this could make it tougher from an affordability angle to get a mortgage.”

Austyn Johnson, financial consultant and founder of Mortgages For Actors, said as well as tighter mortgage affordability, he’s seeing issues on borrowers’ credit reports caused when self-employed applicants struggled to stay afloat during the pandemic or where work has been less available since then. “We’re seeing this especially from those who work in TV as freelancers,” he said. “There have been some issues lately with people being out of work for long periods, which is reflected in their accounts some 18 months later.”

Despite these challenges, brokers say they feel well-supported in most areas of the self-employed market.


Market mirrors pre-pandemic conditions

Billy Roberts, director of Connely Roberts Mortgage Services, said: “In general, I would say the market is on a similar footing to the pre-pandemic market and, overall, the landscape for self-employed mortgage borrowers is strong.

“There were a lot of restrictions due to Covid, but we’ve seen most lenders revert to their pre-pandemic criteria. Halifax, for example, changed its lending criteria for self-employed applicants in October back to its pre-Covid policy. This means the bank will now rely on the average of two years’ income again as opposed to relying on the lower figure, if the total income was less than £50,000 per annum.”

Mercedes Osborne, director of Pointers Financial, said lenders have diversified their criteria to make sure those who are self-employed have options.

“Coventry Building Society is a great example,” she said. “It will use the latest year’s net profits in its affordability assessment, which is fantastic for businesses in their early years whilst they grow. This is of course still subject to underwriting, but often really makes a difference.”

Osborne also pointed to Barclays’ changes to its contractor policy, which means the bank will now use the day rate calculation up to 90% loan to value (LTV). “It’s a good option for those with smaller deposits,” she said. She also applauded Accord for its common-sense approach to applicants’ income and circumstances.

Aldermore’s Cooper added: “I think today’s self-employed market is likely on a par with pre-pandemic conditions. There are specialist lenders out there that cater specifically to the self-employed, and other lenders who have more accommodating criteria requirements.”

The bank has made changes to its self-employed criteria in recent weeks. Borrowers with at least two years of trading accounts now have access to criteria levels and LTVs that are offered to employed applicants.


Room for improvement

But there are still some under-served areas.

Roberts said options remain limited for borrowers who have one year’s accounts or who need to use their most recent year’s profits.

“If the client has many years’ experience in a particular industry with a proven track record of similar earnings, we personally think using the first year’s income figures along with some comfort that their income is going to [be] sustainable, such as a projection for the next year, should be sufficient for lending,” he said.

Brokers also want to have more direct access to underwriters for self-employed borrowers to explain income nuances and the circumstances that surround them.

Johnson said a greater understanding by lenders of contractor income would be beneficial for his clients.

“Some contractors become tiered,” he said. “Where they have had, for example, contracts worth £10,000 issued five times a year, they may then start to pick up £20,000 contracts each time. But this is not reflected in accounts until the next financial year. Lenders always want to see a few of those contracts to be comfortable, but if they understood the industry, they would know that this client will now be focusing on those higher contracts and it shows what level of pay they’ll receive for the foreseeable future.”

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