Open Banking for self-employed borrowers will bring quicker applications – Pearson
In fact, close to 10 per cent of digitally active HSBC UK customers are using Open Banking services, with the number growing all the time.
We have been looking at how we can integrate this fantastic technology protocol.
We have seen applications across current accounts and unsecured lending products, where it has made a real difference making life quicker, easier and safer.
And I am extremely excited to now see Open Banking being integrated into our mortgage process in a small but important way that will see the time it takes to go through the underwriting process being much reduced for self-employed applicants.
It will mean they don’t have to go through the hassle of digging out and wading through months’ worth of paperwork which would then need to be submitted either electronically or by post.
After all, as the famous business saying goes “time is money”, and who wants to be doing admin for a mortgage application when you can be running your business, or utilising that time with more fun pursuits?
Let Open Banking take the strain.
We are partnering with Experian on this initiative to speed up the mortgage process for self-employed customers.
The mortgage applicant must be with one of the twenty providers that allow data sharing, a list that, as you would expect in this day and age, includes all the big names and most popular providers.
Why are we doing it?
The simple answer is that it will make a positive difference.
The effects of Covid-19 have been seen far and wide, and literally everyone, self-employed or not, has been affected in some way, shape or form.
Each industry is different and each business within them is different. The landscape for many had changed significantly, so in some cases we needed to ask for a bit more information from self-employed customers to make sure we’re lending appropriately.
This had a knock-on effect whereby in some cases we needed to go back to the broker and ask for more information before completing an assessment. That added time to an application.
When that was done the case would be ready for review and of course with the extra information required, it naturally takes more time for an underwriter make a reasonable assessment of the application. Or it did.
Open Banking provides the customer and broker with a quicker and easier way of supplying business bank statements which eradicates errors and significantly speeds up our ability to assess what those bank statements are telling us.
When you have a scale business, assessing thousands of applications every week, every minute saved in manually wading through additional statements can then be re-invested in getting to the nub of the lending decision and speeding up the lending process overall.
We are very conscious of concerns about the access to information and Open Banking is a very closely regulated process.
But we recognise that customers and brokers alike will have some natural reservations while wider adoption of the technology becomes more the norm.
With the customer’s authorisation we only extract, retain and use the data that is required for this agreed purpose and no other data is held or used by HSBC.
Priority for Open Banking cases
The benefits of using Open Banking this way are easy to see and it is absolutely vital we all embrace this new technology as it clearly signposts the future of self-employed underwriting.
But it also has much wider practical applications to simplify the way we operate.
As an added incentive HSBC will prioritise those self-employed applications that use Open Banking to demonstrate affordability.
We’ll obviously have to wait and see how the take up of Open Banking for self-employed customers goes over the next few months.
However as the technology gains traction with customers and the benefits become plain to see, HSBC will continually assess how to widen its practical development across the business.
Santander to disregard 2020-21 tax year for self-employed borrowers
Instead, from 19 April Santander will base its income assessment on the 2018/19 and 2019/20 accounting periods.
However, the lender said it will need to take into account future Covid-19-related liabilities such as paying back loans or deferred tax.
And it is urging brokers to call it before submitting cases where:
- the client’s business and/or income has been adversely affected by coronavirus; and/or
- the client is using 2020/21 figures for income assessment; and/or
- the client has any future Covid-19 related liabilities.
Deduct future liabilities
In a message to brokers Santander said: “From Monday 19 April, we’ll be changing the way we assess self-employed income for all new residential applications where the business and/or income has been adversely affected by Covid-19.
“Where your client’s business and/or income has been adversely affected by Covid-19 we’ll discard the 2020/21 accounting periods (if available), and our income assessment will be based on the 2018/19 and 2019/20 accounting periods.
“It will be necessary to deduct any future Covid-19 related liabilities from the net profit/profit (after tax) as these will be ongoing costs for the business e.g. bounce-back loans, BBILs or CBILs repayments and deferred tax liabilities.”
All full mortgage applications submitted by 9pm on 18 April will not be affected by these changes.
Any applications submitted from 6am on 19 April, or where a material change is made to an application submitted before 9pm on 18 April, will be assessed on our updated lending policy.
Buy-to-let applications are unaffected by this change.
Poll: Is the mortgage situation for self-employed borrowers improving?
Self-employed borrowers have been particularly hard hit over the last year, but as lockdown eases, the economy opens up and a new tax year arrives there appears to be light at the end of the tunnel.
So with lenders widening availability for employed customers, is this also happening for your self-employed clients?
Are product availability and criteria improving for self-employed borrowers?
Changing tax year means lenders can no longer put off self-employed borrowers – JLM
As the clock ticked over to midnight and a new tax year began, every single self-employed person is able to prove exactly what they earned over the last 12-month period.
Lenders will be presented with irrefutable proof of those earnings and will be able to use their traditional measures of judging a self-employed person’s mortgage affordability to genuinely ascertain how much they will lend, and the borrower’s ability to pay.
They will no longer be able to suggest that last year’s lockdown period(s) represents the true nature of the self-employed borrower’s income for the year, because they’ll have the yearly income right there in black and white.
And they will not be able to put off any decision because they need to see exactly what the full 2020-21 tax year figures for that potential borrower are, because they’ll have that information.
Lenders will be able to take an average of the last two years’ income, or they can just use this the past year’s accounts.
Because after all – using the argument they’ve pushed time and time again recently – last year is likely to have been the worst of the two because of the pandemic, so they’ll have exactly what they need to make the lending decision.
Changing tone from lenders
It’s at this point that we now anticipate a shift in tone from certain lenders.
After a year in which a large number of lenders have actively discouraged self-employed borrowers applying for mortgages with them, we anticipate there will be a major marketing and advertising push to encourage these borrowers to apply.
Lenders will boost their income multiples for self-employed borrowers, will move their criteria and pricing more in their favour, will offer them the same access to higher loan to value (LTV) products as they have offered their employed borrower counterparts over the last six months.
Because now self-employed borrowers will more than likely be seen as lower-risk than employed borrowers.
After all, lenders will have total transparency on the self-employed borrower’s finances. Whereas in the employed space there will still be uncertainty about their employment prospects and potentially around their incomes in the future, and their ability to keep paying their mortgage.
Is this just fantasy?
In essence, the tables should really turn for self-employed borrowers.
Lenders’ message to self-employed borrowers will now no doubt be positive and clear – we want your business.
That will be exactly what will happen if the lenders who have treated self-employed borrowers in such a poor way are in any way consistent with their most recent approaches to this borrower demographic.
Or are we just describing a fantasy? We’ll leave you to decide.
Lenders tighten self-employed affordability – MBT
The number of self-employed mortgage applicants receiving at least one offer matching their affordability requirements also dipped in February.
The biggest change was the average minimum loan available, which fell by more than 18 per cent to £96,935 – reflecting a significant tightening of self-employed affordability criteria among some lenders, MBT said.
And the average maximum loan available to self-employed mortgage applicants dropped by just over two per cent to £216,000 in February.
This meant the spread between the average minimum available loan size and the average maximum available loan size widened to more than £119,000.
“For brokers who only try one or two lenders, this can give a false impression that their clients have no chance of achieving the loan size they require,” MBT added.
Meanwhile, just two-thirds of self-employed cases processed through MBT Affordability had at least one affordability option, down from 71 per cent in January.
Instead, 31 per cent of cases were deemed to be unaffordable based on the required loan amount and lenders were unable to lend on two per cent of cases.
However across the whole of the market, 79 per cent of cases were affordable in February, slightly down from the peak of 80 per cent in January.
And there was at least one lender able to meet the loan requirements of 86 per cent of first-time buyers, 84 per cent of remortgage customers and 81 per cent of home movers.
‘Complex affordability landscape’
Tanya Toumadj, CEO at Mortgage Broker Tools, said: “The self-employed continue to face a complex affordability landscape as more lenders tighten criteria for mortgage applicants in this group and the number of options reduces.
“However, it’s important to remember there was at least one affordable option for more than two thirds of self-employed cases processed through the MBT Affordability platform in February.
“The message here is that the choice of lender makes a big difference to the amount a self-employed mortgage applicant can borrow, so brokers need to make sure they are considering all of the affordability options to ensure they are providing their clients with the most suitable recommendations.”
Just Mortgages trains self-employed brokers to head up own firms
The sessions aim to give the self-employed brokers the resources they need to recruit, manage and progress their own businesses. The firms will remain under the Just Mortgages brand and receive the same support they currently do.
Just Mortgages said the training programme was in response to brokers who had gone self-employed and had since been asking for the ability to expand.
Through the programme, 39 self-employed brokers have hired staff in recent months and Just Mortgages expects 15 more advisers to do the same by the end of the year.
The six-week training sessions have been taking place online and are led by former brokers from the Just Mortgages team.
Attendees are given information on how to run a team of brokers, daily operations and how to develop a business strategy. They are also given advice on how to recruit the right people for their teams.
The Just Mortgages self-employed division now has 345 advisers and is looking to grow to 460 by this time next year.
With IR35 changes set to alter the way self-employed staff pay tax from April, Just Mortgages said it did not expect any issues arising from the regulations relating to the new firms.
It also said it would support the advisers to make sure both they and their businesses were compliant at the time of setting up the business and throughout its growth.
Rodney Sloan, head of training at Just Mortgages, said: “Many self-employed brokers are lone wolves. They are brilliant brokers who are great at communicating with clients, however they lack the experience of managing another broker.
“The set of skills required is slightly different, and our training programme is designed to give these brokers all the tools they need to succeed.”
Sloan added: “Key to the success of these programmes is the buy in from the participants. We never push people to take part and those who enroll onto the courses have to commit fully.
“Those who have committed have shown promising signs already and we are really excited about the future of the programme.”
First-time landlord interest holds for tenth consecutive month – Knowledge Bank
It marked the tenth consecutive month the criteria appeared in the top five most sought-after terms for buy-to-let (BTL) brokers.
Knowledge Bank said indicated that more people were turning to property for investment opportunities.
Lending to limited companies followed as second most-searched BTL term, while requirement to be a homeowner was the third most-searched.
Residential income concerns
Changes to borrower income, and lender attitudes towards it, were of most concern in February for residential brokers – as mortgage searches for furloughed workers topped their list.
Self-employed and income multiples were among the top five along with ‘soft footprint decision in principle’. This suggested brokers were looking for processes which would not impact their clients’ credit rating or future borrowing abilities.
Debt management was the focus in the second charge market, relating to two of the top five searched terms including debt consolidation and debt management plan.
For the tenth month in a row, ‘maximum loan to value (LTV)’ was the most searched term for brokers in the second charge sector. Knowledge Bank said it implied borrowers hoped to benefit from lower interest rates by securing loans against their homes.
Matthew Corker, operations director at Knowledge Bank, said: “The rental market in the UK is receiving a lot of interest at the moment. Perhaps as a result of the volatility in the stock market due to the pandemic, investors are turning to what they see as a safe investment.
“With house prices increasing in the past year and interest in rental properties also on the increase, this trend could be set to continue.”
Corker added: “The furlough scheme was again at the top of the list for brokers in the residential market, and the latest extension to the job support scheme will undoubtably result in more lenders adjusting criteria.
“With changes coming thick and fast, brokers could spend hours every day searching for the latest criteria, so using a comprehensive criteria search system can save them a massive amount of time and ensure they are providing best advice.”
Two more tranches of help promised in budget for the self-employed
The fourth self-employment grant will stay at the current level covering February to April, offering up to 80 per cent of trading profits or £7,500 over three months.
For the fifth grant, available from July, people whose turnover has fallen by 30 per cent or more will continue to get 80 per cent of average profits; those whose turnover has fallen less than 30 per cent will receive a 30 per cent grant.
The Treasury said last year that a fourth grant would cover the months of February to April. But self-employed workers have been frustrated about the lack of detail about the scheme, despite the grant period having already begun.
Eligibility of the SEISS grants has also been widened to include about 600,000 people who became self-employed in the 2019-20 tax year, as tax return data for 2019-20 is now available. These workers were excluded from previous grants as you needed to have filed a tax return for 2018-19 to apply.
However, many workers who have not received any government support so far will still be excluded from financial help.
These include directors of limited companies paid by dividends, anyone newly self-employed, freelancers paid via PAYE and workers earning more than £50,000 a year.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The extension of the self-employment grant to those who have just submitted their first tax return will come as a huge relief. The last year has been an incredible struggle in impossible circumstances without government support beyond Universal Credit. They will finally get more of the help they so desperately need.
“However, this doesn’t help all of those excluded from government schemes. There’s no respite for self-employed people with profits of over £50,000 or who receive less than 50 per cent of their income from self-employment, who will continue to battle on. It must seem even more unjust that the scheme is scooping up hundreds of thousands more people, and still leaving them behind.”
Clydesdale Bank and Skipton BS introduce LTI caps
The changes will see self-employed borrowers join those needing loans above 85 per cent loan to value (LTV) and borrowers with incomes lower than £50,000. Applicants outside of this criteria will still be allowed to borrow up to five times their income.
All self-employed income, 100 per cent of the pension and allowable benefit income will be included in the LTI calculation.
The change will not affect day rate contractors who meet the bank’s contractor criteria.
Applicants already in the pipeline will not be affected but cases submitted after 8pm on 3 March will be assessed using the new policy.
Skipton Building Society has capped LTI for applicants with borrowing needs above 85 per cent LTV to 4.49.
This will apply from tomorrow and pipeline or decision in principle cases will not be affected by the changes.
All other LTI criteria remains the same with Help to Buy and shared ownership mortgages at 4.5 and applications below 85 per cent LTV at 4.75. For applicants with a household income lower than £40,000, the maximum LTI is 4.45.
Lenders cut maximum loans as affordability used to regulate mortgage volumes
According to analysis by Mortgage Broker Tools (MBT), one in five cases through its portal in January did not get offered the loan value requested as lenders are increasingly using affordability to regulate business volumes.
Its affordability index showed in 20 per cent of cases submitted no lender met the loan requested, with an average gap on these of £15,380 – eight per cent below the loan requested.
It noted this was indicative of the overall average maximum loan available to mortgage borrowers dropping to the lowest value it had recorded since launching a year ago.
This fell 12 per cent from a year ago to £234,224 and was a drop of nearly 14 per cent from its peak in September.
The biggest squeeze on affordability was for first-time buyers as the average maximum loan available to this group fell 13 per cent to £230,555 this January, compared to £264,411 a year earlier.
However, self-employed borrowers fared somewhat better than expected, although their maximum loan value remained below that of first-time buyers.
The average maximum loan offered to self-employed mortgage applicants was £221,400 in January – a fall of just over three per cent from its peak in August.
And perhaps surprisingly the minimum average loan available to the self-employed recovered to £118,800 – an increase of 45 per cent on its lowest point in April, and up 43 per cent on November.
Lenders making more adjustments
MBT CEO Tanya Toumadj (pictured) highlighted the increasing use of affordability tweaks by lenders.
“One of the trends we have noted in tracking affordability over the last year is that affordability has become a key lever for lenders in controlling business volumes,” she said.
“Traditionally rate has been changed by lenders as a means of growing or tempering lending levels, but increasingly lenders are also using criteria and affordability calculations.
“Through the second half of 2020, when customer demand was high and lender service was under pressure, we saw around three to five changes to affordability calculators every week.
“The record low maximum loan amount available in January reflects this ongoing dynamic and the mounting pressure on lenders as we approach the scheduled end of the stamp duty holiday.”
However, Toumadj noted brokers should not be disheartened as product choice was rebounding and now at its highest level since prior to the first lockdown.
“Our data shows there is a suitable affordability option for 80 per cent of all cases and so, while the average trends may be down, there are still lenders that want to, and are able to, lend the loan amount requested by most clients,” she added.