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Self-employed affordability drops to lowest level

Journalist: Jake Carter, Mortgage Introducer

ended 16. January 2023

According to Mortgage Broker Tools Affordability Index, one in every three self-employed mortgage enquiries were considered unaffordable at the end of 2022.

Is this something you have witnessed? 

Why do you believe self-employed affordability has dropped so low?

What are your expectations for self-employed affordability over the course of 2023?

3 responses from the Newspage community

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Mike Staton
Director at Staton Mortgages
I think the major factor with self-employed affordability is the amount the applicant is declaring. Only this morning have I received an email from a SE applicant asking what he needs to declare to obtain a mortgage, the answer is simple, what you earned. Too many SE applicants become SE for the tax perks, you must remember that you won't beat the tax man and the banks at the same time. Lenders will accept a varied amount of evidence for their earnings ranging from an average of 3 years' books to the latest years. Some will take dividends whilst others take net profit. If you are self-employed and declaring a true amount, speak to a broker and get a realistic affordability assessment along with advice and make sure your books are done as close to April as possible, most lenders won't use your latest tax returns if older than 18 months
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Graham Cox
Director at Bridging Hub
This is unsurprising given the current state of the mortgage market and the cost of living crisis. Self-employed applicants also tend to be restricted to a lower loan to income of 4.5 times, which doesn't help. Having said that, there are more lenders who'll consider the net profit (mostly after tax but one or two will use pre-tax) and salary, rather than dividends and salary. This can improve affordability hugely if the borrower has retained profits.

But in general, the 'answer' to improving affordability is to lower house prices which are already happening but have a long way to go in my opinion.
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
With the self-employed, more than any other group, knowing which lender to approach is key to getting the best affordability outcome. You see, "income" is defined differently by different lenders; some will average the last 3 years' net profit, others 2 years and a few will use just the latest year. That alone can make an enormous difference to the mortgage being offered by different lenders, given that 3 years ago many people's income was rock bottom due to lockdowns. If they are a director of a limited company then it gets even more complicated, as well as knowing if a lender averages over one, two, or three years you also need to consider if they define income as the director's salary and their dividends, or their director's salary and their share of the net profit, plus whether they use the pre-tax or after-tax figure.