Self-employed borrowers - have things changed?

As self-employed mortgage advice is our niche, we see a fair amount of clients who fall into this bracket and have similar concerns. Self-employment always comes with an air of uncertainty as income structures are generally more complex than other employment types. Add to that the recent market and criteria changes and it can leave a lot of people feeling anxious and overwhelmed when it comes to their financial situation and mortgage prospects. Now more than ever, people need to seek relevant advice to ensure they're in the best and most appropriate position possible when it comes to making financial decisions. There are already lenders who naturally approach this type of employment with a more intuitive outlook, but other lenders need to step up if they claim to be treating customers fairly.

As always with self-employed borrowing, it's more about timing than anything. Self-employment tends to be a variable or seasonal income and if you apply for a mortgage when you are having a low spell, you are going to have problems. Nothing has changed with underwriting, just that lenders are looking more for inconsistencies with income. Since 2020, self employment has either taken a huge hit or, in the case of some sectors, a huge boost. If you did have a good year, out of the norm, then you have to prove the consistancy and plausibility of this continuing onwards, even more so when you are stretching your affordability to the max. Self-employed specialist lenders such as Precise are more forgiving with seasonal fluctuations, but always check pre-app. Plan ahead, time it right and look at income on bank statements, not just tax forms.

Unfortunately, the self-employed have been persecuted by lenders ever since the pandemic and the mini-Budget seems to have created another knee-jerk reaction from a large number of lenders towards all types of self-employed borrowers. Typically this is an approach where they will look for any reason not to lend, rather than looking for a reason to lend. There are, of course, lenders that truly understand and support clients who are sole traders, directors or contractors / freelancers such as Coventry Building Society, Accord, Kensington and Saffron Building Society. But when a client has a case declined for a spurious reason they will of course discuss this with colleagues , friends and family and this creates the impression that all lenders are distrusting of the self-employed and hesitant to lend. Those lenders with specialist underwriters for the self-employed / contractors and with specific criteria and policy such as one year's self-employment, the use of net profit before or after tax and director's salary and contractor-specific day rate calculations are those that excel in this market. We need to see more lenders educate themselves and their staff that the self-employed are not "a lending risk" and are in fact the entrepreneurs of the future and will drive our economy forward.

It has got tougher for self-employed business owners to get a mortgage over the past few months. Cost of living pressures are reducing affordability and lenders are particularly cautious with owners or directors of hospitality businesses. Many pub and restaurant businesses are experiencing reduced profitability in 2022 due to the massive increase in energy costs. Even if the latest year's submitted company accounts show a sufficient profit, some lenders are asking for management accounts or an accountant's projection for the current trading year to reassure themselves. Lending multiples for self-employed applicants tend to be restricted to a maximum of 4.5 times income (salary and dividends or salary and net profit), whereas employed applicants can often borrow 4.75-5 times their salary, subject to affordability. Having said all that, for business owners with stable or increasing profits, low personal debts, a good credit history and a decent size deposit, getting a mortgage is usually straightforward.

Currently, I've seen no evidence of lenders changing their stance on self-employed borrowers, so they are still able to access mortgages with as little as one year's accounts for some lenders and at the same rates, loan sizes and deposit levels as employed applicants in the main. Self-employed borrowers however should certainly engage a mortgage broker to help them, as lenders do have a varied view on how they assess the self-employed; some will want to use the clients HMRC tax documents, others will rely on an accountant's reference and others will look at the accounts of the business. Then they will use one, two, or three years averaging of the income, depending on the lender. For Limited Company Directors most lenders will look at their salary and dividends as reported to HMRC, but some lenders will use the salary and their share of the net profit - which can be very different figures and have a massive impact on the size of mortgage you can obtain. Knowing which lenders use which calculations, is where a broker can make a huge difference to your mortgage search.

Time and after time, we hear the words "I'm self-employed, so it must be really hard for me to get a mortgage" and unfortunately, in the post-Covid world, lenders have made it very challenging for self-employed people. The mini-Budget has added another level of difficulty altogether. Covid certainly made people change their businesses and adapt to the new world and we have seen some amazing success stories, so it has been refreshing that some providers will look at cases on an individual basis and accept them on their own merit. Personally, Accord, Platform, Coventry and Skipton have stood out and the ability to speak to an underwriter and the help of the BDMs has really helped. This is the advantage of speaking to a mortgage adviser.

With regards to a lender underwriting a case where there is self-employed income, this has not changed since the fall out of the mini-Budget. What has changed is what has happened since the fallout from the pandemic. Pre-pandemic lenders did not ask for the current three months' business bank statements. This request is now a common request with most lenders. The lenders that do request this, want to see consistency with the other self-employed income proofs. They may ask for the projected income and an accountant would need to provide this. All self-employed borrower’s circumstances are different. A certain lender may be good for one borrower, but not for another borrower. It's usually based on the levels of income over the last couple of years, plus credit history. If there has been a decline in income, then Kensington would accept this, as long as it meets their affordability calculations. TSB and Virgin would do the same, but they would want a plausible explanation of why it has declined. If the income has increased, then Coventry Building Society would use the latest year's income, instead of the average, if there is not a large jump. This would work well, as it means more lending than compared with a lender that would use the average This will work well for the client, as it would mean more lending than compared to a lender who will use an average of the last two years.. If a client has one year's accounts, then Halifax, Precise, Foundation, and Newcastle Building Society, to name a few, would accept this. Any lending is subject to credit checks and assessment of the borrower's circumstances and not the self-employed status on its own. There needs to be more education and information from lenders when it comes to self-employed borrowers. There is a stigma amongst self-employed borrowers that it is going to be very difficult for them to obtain a mortgage when this is not necessarily true in most cases. This highlights the importance to see a broker when looking for a mortgage. A good broker will assess their income, and Ltd company's income if the borrower is at least a 20% shareholder, and then assess the best way forward. To take the above stress, hassle, and anxiety away from the borrower, is why we, as a firm, specialise and niche in mortgages for the self-employed and business owners. Most of our social media content is on this, and we do. this to create awareness. Something which is lacking.

Getting a mortgage being self-empoyed is no more difficult than being employed if you are prepared correctly. Ensuring all your documents are correct and up to date, and not being shocked when a broker asks for them, is a good start. The main issue when looking at mortgages for the self-employed is the understanding that you can get a mortgage on what you tell the HMRC you are paid, not what actually goes into your bank. Once you understand that, the process is a whole lot easier.

As is stands at the moment, I don't know of a single lender that has changed their criteria around self employed clients. I think where there has been a shift however is in the clients themselves. We are all more concerned about future increases in costs and how a recession might impact our income. Due to this I think that self employed clients are becoming more cautious and don't want to stretch themselves too far due to uncertainty about the future.