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Pepper Money makes ‘significant improvement’ to self-employed criteria

Pepper Money makes ‘significant improvement’ to self-employed criteria
Anna Sagar
Written By:
Posted:
September 26, 2024
Updated:
September 26, 2024

Pepper Money has widened its self-employed criteria to allow borrowers to use net profit retained in affordability calculations.

The lender’s change to its self-employed criteria will allow borrowers to use the latest year’s net profit in affordability calculations where the customer is a majority shareholder in the business.

The firm will use the share of net profit in line with the borrower’s share. For instance, if a customer is a 60% shareholder, then the lender would use 60% of net profit.

For joint applicants with a combined shareholding of 100%, the lender will use 100% of net profit.

Pepper Money said that the improvement to its self-employed criteria aims to cater for customers who choose to retain profits in their business to pay towards a future tax bill or capital investment but want to leverage their full earnings for affordability purposes.

Ryan Brailsford, business development director at Pepper Money, said: “In 2023, there were an estimated 5.6 million UK private sector businesses, with 75% of these not employing anyone aside from the owners of the limited company.

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“There are often occasions where a limited company director may decide to retain some of the net profit within the business instead of paying it all as dividends. Profit may be kept in the business to facilitate further growth or for tax purposes, and in the right circumstances, net profit can be seen as income that is available for the customer to take in the form of dividends at any time.”

He noted that there had been a growing trend in “self-employed profitability” in recent years, so there was a cohort of customers who may be looking to keep cash in their businesses rather than paying a dividend.

“By introducing this new self-employed criteria that considers retained net profit within an affordability calculation, we’re further demonstrating our commitment to serving the self-employed and making it easier for them to secure the mortgage they deserve,” Brailsford explained.

David Hamblett, director at New Wave Financial Services, added: “Affordability continues to be a significant challenge for many mortgage customers, particularly the self-employed, who often choose to only draw the income they need from a business.

“This approach is more tax-efficient, but it can also limit their borrowing power when it comes to getting a mortgage. This criteria enhancement by Pepper Money is a welcome change to address the needs of the self-employed.

“By basing affordability calculations on net profit retained within the business, Pepper is giving those customers the opportunity to achieve a mortgage that more accurately reflects their earnings, resulting in them being able to purchase their ideal home.”

Pepper Money recently made a raft of criteria changes, including to its new-build, automatic valuation model (AVM) and maximum age criteria.