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Giving up on the dream: is the mortgage lending process killing self-employment?

Journalist: Kate Steiner-Dicks, Freelance

ended 24. October 2024

New research from Aldermore reveals the extent to which self-employed first-time buyers are struggling to get on the property ladder. A staggering 40% of self-employed first-time buyers admitted to abandoning their businesses in order to secure a mortgage. This drastic measure highlights the difficulties faced by those with non-traditional income streams when trying to meet lenders' criteria. The research also found that self-employed individuals are twice as likely to be rejected for a mortgage compared to those in traditional employment and end up paying for rent and a mortgage.

Questions:

  1. As small business owners, do you agree that the traditional mortgage market is killing self-employment in the UK?
  2. With more people going freelance, what will it take for more mortgage lenders to have more confidence in self-employed applicants? 
  3. Do mortgage lenders see PAYE umbrella company contractors as a safer bet than truly independent (limited company directors and sole traders) contractors? If so, why?
  4. How do you see the upcoming budget influencing mortgage lenders' and underwriters' assessment of self-employed mortgage applicants?

6 responses from the Newspage community

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Stephen Perkins
Managing Director at Yellow Brick Mortgages
Whilst there are mortgage lenders who can lend after a first year of trading, setting up a business is a brutal and challenging process that often takes three or more years to get fully established with a reliable income. This doesn’t always correlate with house ownership plans and for many part way through those early years will be tempted back to the safe and reliable PAYE path, which also simplifies and often boosts affordability withinthe mortgage application process.
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Darryl Dhoffer
Founder at The Mortgage Geezer
No surprise that lenders view PAYE umbrella company contractors, as its primarily percieved as having predictable income and stable, however lenders do need to adapt more flexible underwriting criteria, and tap into a growing market of self-employed borrowers. If the government introduces measures to support self-employed individuals, such as tax breaks or improved access to finance, lenders you would hope, may be more willing to offer more mortgage options - that said if taxes increase, then can only see lenders apply the brakes for self-employed borrowers.
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Dariusz Karpowicz
Director at Albion Financial Advice
Being self-employed and seeking a mortgage is like playing Snakes and Ladders blindfolded - just when you think you're climbing up, you might slide right back down! The fact that 40% of entrepreneurs are ditching their dreams for a mortgage is simply staggering.
The issue isn't really about lenders discriminating against the self-employed; it's more about the challenge of assessing variable incomes in a system designed for predictable PAYE earnings. While umbrella company contractors might get an easier ride due to their PAYE-like income structure, limited company directors often face tougher scrutiny despite potentially being more financially stable.
Looking ahead, what we really need isn't just tweaks to the current system, but a complete rethink of how we assess self-employed income. The upcoming budget might not revolutionize things overnight, but there's definitely room for innovation in how lenders evaluate self-employed applicants.
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Adam Stiles
Managing Director at Helix Financial Partners
If this research is true then it is very sad to hear. Self-employment should be celebrated and not penalised. Anyone thinking or considering switching from self-employed to employed purely to secure a mortgage should always seek professional advice as there are a number of ways to approach self-employed income and many lenders view it differently.

The difference in the amount someone can borrow between lenders and how they view income is staggering. Switching from self-employed to employed shouldn't be a knee-jerk reaction to some cautionary tale someone has heard second hand. There's plenty of help available to assess what is achievable and we as advisers and lenders alike need to help educate more in this area.

Self-employment shouldn't be an obstacle to getting a mortgage.
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Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
We specialise in working with self-employed / company directors and overall, we don't see it being a significant barrier to getting a mortgage.

Generally lenders will want to see a couple of years of consistent income which is different to someone employed under PAYE who may only need to have a contract of employment.

After this time has passed though, in our experience lenders are as open to lending to self-employed as they are employed. It's just important to understand their criteria and what they are looking for, particularly for limited company directors where some lenders will still only factor in what has actually been drawn from the business in dividends and salary, rather than their share of the net profit.
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
Lenders haven’t been as open and useful for the self-employed as they are now since the days of self-cert mortgages. We have lenders happy to lend with just one year of trading, some will look at projections, others have specific rules for sub-contractors, or those contractors working via Limited Companies, or third-party Umbrella Companies. Some lenders will look at a directors’ salary and dividend income, other will look at their salary and the businesses net profit. There is no reason why mortgage lending should be the issue for someone to not follow their dream of self-employment. Where I do find people coming unstuck is when they think that "cash in hand" jobs don't need to be declared to HMRC, but can then somehow be taken into account when it comes to a mortgage application, or people can be very animated about how clever their accountant is in reducing their income to lower the tax bill, but are then surprised when they struggle to get the mortgage they want or need.