It is time to debunk the misconceptions surrounding borrowers’ mortgage chances, writes Leah Milner
Mortgage options for the self-employed have improved in recent years, but despite positive changes in the market, brokers say it is still much harder than it should be to place credit-worthy cases.
The vast range of different scenarios that a self-employed borrower may present make the process of sourcing a mortgage incredibly labour-intensive for advisers.
It seems that almost every lender in the market takes a slightly different view on how they will assess a borrower’s earnings pattern over time or company structure.
While tools such as Knowledge Bank and Criteria Hub help to make a borrower’s potential eligibility for certain deals more visible, brokers say they still have to phone around numerous BDMs in order to find a lender willing to offer the required loan size to their trickiest cases.
Most lenders still take a much more cautious approach to self-employed borrowers than they do to those in employed roles. Yet these borrowers are optimistic about their financial prospects. Research by Kensington Mortgages found that 62 per cent of self-employed workers are confident they will take on new work in 2019, up from 47 per cent last year. The number of self-employed workers has risen from 3.3 million in 2001 to 4.8 million last year, so that they now account for 15 per cent of the workforce, according to the Office for National Statistics. The rate of unemployment among the self-employed is at its lowest level since 1975.
Many argue that the recovery in the availability of mortgages for these borrowers since self-certification loans were banned has not kept pace with growth in demand from the increasing number of people going self-employed.
Active Mortgage founder Gary Das has written a book on the subject – The Self-Employed Mortgage Guide – after his own experience of trying to secure a home loan as a company director back in 2015. He also runs a Facebook group called Mortgage Pro Free Group to help other brokers learn about this part of the market and share knowledge about where to place difficult cases.
“It is still like trying to fit a round peg in a square hole,” he says, “but the key is preparation. That is our whole ethos.”
Sometimes, self-employed borrowers he is unable to help come back a year later when they have concentrated hard on getting their business in shape, hired an accountant and taken all the steps he has suggested to maximise their mortgage chances.
Getting the best deal
One myth frequently circulated that causes Das some degree of frustration is that self-employed borrowers need three years of accounts. “That is just a massive misconception. There are now a handful of lenders including Halifax and Kensington that will work with one year’s accounts.” It is clearly a criteria feature that many brokers seek for their clients as “will a lender consider an applicant who only has one year’s accounts?” is one of the top searches on Knowledge Bank. Das hopes that more lenders will start to accept one year’s accounts in the future. “There should be more lenders willing to do this so long as the applicant has previous years’ experience within the same trade. There still needs to be more in the way of logical lending decisions.”
West Yorkshire Money managing director Adele Forbes, a former underwriter-turned-broker, agrees. “There are still very few lenders that allow this and yet employed clients can get a loan when they have only been in their job for a day,” she says.
But Das points out that for self-employed borrowers who use Halifax for this reason, they are typically better off taking a shorter-term fix and then switching away when that deal comes to an end and they have built up a longer trading history as the lender is not as competitive with product transfer deals.
Another popular criteria search by brokers is “how are self-employed accounts assessed for affordability?” Knowledge Bank chief executive Nicola Firth says: “It is a minefield for brokers as it is virtually impossible for them to remember what each lender’s rules are with regards to affordability assessments – for example, do they take an average of the last two years’ income or the last three years’? Do they use the most recent year’s figures? Do they use net profit before tax or net profit after tax?”
Lenders that are willing to base their calculations on the latest year’s accounts are extremely helpful for clients that have seen a jump in income who want to borrow as much as they can. These include Santander and Coventry Building Society, while Das says that Aldermore, Kensington and Pepper will also consider these cases. He believes it is always a good idea to make sure that you have both the client’s completed self-assessment tax returns and an accountant’s reference in order to give borrowers the best chance of success. “It is about backing everything up with the qualification and the authority that an accountant adds to an application,” says Das.
But he warns that brokers must always ensure that their clients are not pushing themselves too far. “It is all well and good giving a client the highest affordability they can possibly get – but you should not be stretching their budget. There is a reason why lenders hover around the 4.5 times income multiple.”
Another headache for self-employed borrowers and their brokers alike, concerns the way in which a company director may choose to take income from their business. Das believes that lenders need to get more savvy about this and put themselves in the mindset of business owners. “Some directors who do not need to withdraw cash from their business to support their living costs will leave money in the company because they know that they have the ability to take it out in the future.
“But in the past these borrowers were almost having to pay unnecessary tax early just for the sake of getting a mortgage. If you are lending to business owners who might have £100,000 worth of profit but their lifestyle only costs them £40,000 a year, why would they want to withdraw another £60,000 just to prove that they can get a mortgage?”
Falling foul of application problems
Self-employed borrowers whose accounts show declining profits can face yet more difficulties. Firth says: “This often catches less-experienced brokers out. It would be easy to think you had followed the rules and taken an average of the last three years’ profits to get the figure needed for affordability, but some lenders will straight out decline an application where there is evidence of a declining profit. “Other lenders will take a view, but again, it is being able to understand who will consider what and navigate around this with the other criteria involved.” In these difficult scenarios, lenders that take a manual approach to underwriting, such as smaller building societies, are likely to be the best option, says Forbes.
Any disruptions in employment or company structure can also pose problems. For example, a sole trader who takes on a significant amount of PAYE or contract work during one accounting period may find this resets the clock on their trading history.
Similarly, switching from sole trader to limited company will also reset the clock on trading history for many lenders, while changes in a director’s share of ownership of a business can impact on their borrowing ability.
Warning to borrowers
One mistake that Das sees all too often among self-employed borrowers is the failure to have a separate business bank account. “Set up a business account, put your business money in there and then pay yourself as though it is a wage,” he advises clients. “Do not just use your day-to-day current account for your business expenses.
A mortgage lender is looking at your bank statements and if they are seeing £2,000 going here and £3,000 going there it can look like money laundering. Lenders will have questions about any amounts over £300.” Meanwhile, other clients are happy to live in their overdrafts because they know that they have money in their business, without understanding that this will cast them in a bad light from a mortgage perspective. It may also be worth warning entrepreneurial clients that lenders may get nervous if they see a director setting up lots of new firms on Companies House.
While this may be completely legitimate and very common among business-minded clients, it is likely to cause some lenders to feel uneasy, warns Das.
The exit of Secure Trust and Magellan from the market has taken two options off the table for self-employed clients, but small building societies such as Darlington, Buckinghamshire and Ipswich seem to be showing more appetite to lend in this space.
Forbes argues that the self-employed sector is still underserved by the current range of mortgage options. She says: “It comes down to educating underwriters – there are some great self-employed clients that the banks should be lending to and in a world that no longer offers job stability to anyone, the self-employed market is set for huge growth.”