Does there need to be a rethink around risk?

PAYE should be seen as riskier than self-employment. Can a self-employed person get fired for something the day after they get a mortgage? Can a PAYE person who has been laid off jump straight onto a new contract and diversify the very next day? Self-employed risk is only a risk because lenders are trying to keep workflow short. If they took the time to review a year of bank statements rather than 3 months, they would see the full income of a self-employed person. In my industry, actors usually get paid more around the Xmas period and then it slows a bit. If they apply for a house in June, they get declined if they are on a quieter month. Lenders like PAYE as it shows income monthly and makes underwriting easy. All a lender would need to do is accept one year's bank statements. Hey presto, income proven and risk gone.

Computer says no, but it's no longer 2008 and lenders have plenty of data upon which to base risk models. The truth, though, is that it suits the industry to maintain the status quo. Why? Because by artificially making these clients more "risky", lenders have an excuse to charge higher interest rates. The self-employed are agile and resilient but unfortunately it will require a sizeable lender to disrupt this market before others follow suit.

I am sure there have been instances where an employee of a company can obtain a mortgage easier than the owner, due to self-employed lending criteria. That's the absurdity of lending today. It is no secret that a large proportion of lending decisions are based on default statistics and automated processes, hence a preference for low-risk lending propositions. Unfortunately, the self-employed are historically seen as higher risk. While mortgage lenders must lend responsibly, the downside of this is that lending becomes almost a one-size-fits-all filtering system when it comes to the self-employed. Lenders can definitely make it easier for the self-employed, but I do not envy the task of separating the wheat from the chaff.

More often than not, self-employed applicants are left behind when it comes to getting a mortgage with their assessment being based on information that can be up to 18 months out of date. If the shoe was on the other foot and an applicant was employed and presented an 18-month-old payslip, they'd be swiftly told that the information is out of date. Long gone are the days when an underwriter can look at the plausibility of a company's earnings. It's now it's black and white and automated and either fits or doesn't. As much as we'd love to see the industry reinvent itself, unless HRMC adopted something like a quarterly return, which they do with VAT, we just can't see the policy changing to adopt a more updated assessment of a business owner's income.

The logic lenders use is downright illogical. A person on PAYE can lose their job tomorrow, while someone with solid trading history could treble their turnover within a year. There are risks for both clients, but it would make more sense to use a more personalised approach to minimise each risk than the tickbox bureaucracy lenders apply.

Nearly 60% of small businesses fail within the first three years apparently. So from that perspective you can understand why lenders are cautious. That said, more providers now consider a director's salary and share of net profit after tax. A few even use net profit before corporation tax. What's galling is that if profits jump too high in the latest year, often by as little as 20%, many lenders will take an average of the last two year's earnings, rather than use the latest year's figures alone. It's all these little caveats that make it tricky for business owners to get a mortgage for the amount they need. Considering that employees have got all their income eggs in one basket, it's almost perverse that self-employed applicants have to jump through so many hoops.

The risk around employed and self-employed is less about them losing their job, as both can find themselves without work pretty quickly, and more about stability of income. An employed PAYE worker on a £30k basic is nice and easy, they have that as a set income each year and, if they're lucky, a pay rise each year, too. A self-employed person may have a £30k income on the last year’s accounts, but a £27k income the year before and £25k the year before that. How can the lender know that the £30k isn't a one-off good year and they'll drop back to £27k the following year? The risk is not around job security, it is about irregularity of income.

If you are self-employed then it's more tricky to obtain a mortgage as most lenders tend to want up to 2/3 years of trading history. However, some lenders are happy with one year's accounts. A few lenders are content with an applicant switching from PAYE to day 1 self-employed as long as it's in the same profession, e.g. plumber. The word 'risk' is fundamental here. Lenders perceive self-employed applicants as a greater risk than someone who is PAYE. Lenders really ought to assess both applicant types equally and not discriminate one from the other. A PAYE applicant could be made redundant the day after completion and a self-employed person could double their profits. There is no real answer but we need more 'common sense' from lenders. Self-employed people are the backbone of our economy and should not be penalised.

Never forget that the powers that be in our industry do tend to live in 1893. In all seriousness, though, this also applies to housing where pretty much anything not built out of bricks and mortar is immediately labelled as 'non-standard construction' and a bit more of a headache come mortgage time. We're choosing to cling to the status quo of a building technique invented 9000 years ago in Jericho, where the walls still fell down anyway, rather than actually pushing to see if more modern techniques might actually be better in the 21st century.

Lenders simply do not like applicants who don't fit neatly in a box. Income that is classed as non-standard or complex cannot be assessed by automation and therefore requires a more manual and specialist approach, which means more staff and more cost. How can it be that lenders will happily agree a mortgage for a client who is not working with an employed PAYE contract that starts in 90 days' time, but will decline someone who has been self-employed for 6 years because they moved from sole trader to limited company a year ago? The system is broken and stacked against those that choose to work independently. It needs a few brave lenders to do a wholesale review and revolutionize how the self-employed are viewed. In terms of risk, I constantly remind our lender partners that you cannot be made redundant if you work for yourself.

Everything seemed to be going the right way before Covid: criteria for the self-employed, those on zero-hour contracts and contractors were better than ever before. Then Covid hit and lenders all of a sudden became risk-averse again. Borrowers whose income and job didn't tick all the nice simple boxes were scrutinised intensely, and unfortunately in the current economic climate that doesn't look like it is going to improve. The major issue for the self-employed and this will always be the problem is how we report our tax returns. I have known self- employed people who won long-term contracts and trebled their income but can't use that income for 9 months, while pay rises for permanent staff we can take 3 months in advance. Unfortunately, unless that improves we will always be deemed higher risk, but at the moment it seems excessive.