self-employed mortgages

It’s always darkest before the dawn, or so historian Thomas Fuller would have us believe. Despite him coining that phrase in 1650, it’s so apt for the mortgage market right now, in 2023!

Yes, the Bank of England recently raised the base rate to 4% (from 3.5%) in its fight to bring inflation under control. But in contrast, strong competition among lenders to attract new business early in 2023 implies positive indicators of recovery.

Why the focus on variable rates has skewed our focus

To date, commentators have placed too much emphasis on lenders’ standard variable rates (SVRs) reaching 6-7%. SVRs have traditionally been short-term solutions, with many borrowers typically sitting on them until better rates become available.

But the majority of borrowers in the UK aren’t on SVRs! They’re on fixed-rate mortgages and need only really concern themselves with SVRs when they need to remortgage.

To that end, increasing numbers of options provided by keenly-priced products are appearing for borrowers. We’re now seeing lenders offer fixed interest rates at under 4 %, and they’re still coming down!

How has the mortgage market reacted to the BoE interest rate rise?

From what we’re seeing, the market has hardly flinched since the bank’s decision on February 2nd to raise the base rate by half a per cent.

The market wholly expected this most recent rise to 4% — being the tenth in succession. But from that most recent vote, there are signs of opinion changing on the bank’s Monetary Policy Committee (MPC).

Two members now believe the base rate is too high. One MPC member, Silvana Tenreyro, reportedly told the Treasury Committee:

“It took time for changes to the bank base rate to feed through to the real economy and so far, just a fifth of the impact has been felt”.

Tenreyro now believes that monetary policy is doing enough to meet the BoE’s aim of bringing inflation down to its target rate of two per cent, hence her vote against the latest rise.

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

Interest rates may rise further yet — but one bump, or two?

Many mortgage brokers support Tenreyro’s stance, including me. Monetary policy was doing enough to meet the aim of bringing inflation significantly down. Unless another big global shock happens, many chief economists believe a fall in inflation is guaranteed. Eventually.

Even so, two out of nine is still a minority (on the MPC). As such, the financial markets’ expectations are that the BoE base rate may yet rise to 4.5 per cent, but maybe as a result of 2 0.25% increases, rather than a single .50% rise.

What’s actually happening on the ground?

Even before the BoE announced the latest raise, lenders had already taken strides to factor it into their rates.

The Feb 2nd decision will, however, see the cost of borrowing increase for borrowers on SVRs and tracker mortgages across the UK. But fixed-rate mortgages will remain, to a greater extent, unaffected.

There are already signs that the worst is past. The market has picked up again; buyers and sellers who delayed remortgaging when rates were highest are jumping on current rates.

What we’ve seen over the past few weeks is a raging price war between lenders with fixed rates falling daily. And this week, we saw the first re-introduction of sub-4% fixed rate deals appear (since September 2022).

Mortgage rates were already on a downward path late last year following the turmoil of September’s mini-Budget. This trend has continued since and has trickled into February.

One reason for the trend is that medium-to-long-term swap rates, which factor heavily in determining mortgage rates, have continued to improve. This movement has given lenders greater confidence, and has resulted in the more competitive fixed-rate mortgage products our contractor clients are now taking advantage of.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

A new norm…

For those of you wondering if now’s the right time to pounce on your property of choice, let me just reiterate what I said last month. We are categorically not going to see fixed-rate mortgages priced at sub-2%.

In truth, we’ll be lucky to see sub-3 % rates return, even if inflation reaches its 2% target. The general consensus among brokers is a gentle optimism that mortgage interest rates will settle between 3.5% to 4.5%.

It’s a similar story with house prices. It was obvious we’d see a correction following the turbulence and uncertainty late last year. But much of this has already happened, and we’re not (and never were) going to see the 20% crash in housing stock that many ‘experts’ predicted.

All this means that if we’re not at the ‘new normal’ already, we’re not far away from it (failing another global disaster landing).

Neither house prices nor mortgage rates look likely to drop off a cliff any time soon, so contractors – you can proceed with a level of impunity we’ve not seen in a while.

Final thought

The caveat is, as always, what’s best for you will be determined by where your current rate and fixed-term mortgage are now. For specific advice, talk to your specialist broker about your aspirations, and take it from there. We’re happy to have that conversation with you.

By John Yerou

Source: Contractor UK

Self-employed people still face an uphill struggle in mortgage applications, but help is at hand. Though some lenders have tightened their criteria, others are working with mortgage brokers to encourage buyers with complex incomes. Article by Nick Green.

If you run your own business, work as a contractor or earn through freelancing, then you’re disproportionately more like to have your mortgage application refused. Despite an extensive raft of measures from the government to help first-time buyers, from the stamp duty holiday to 95% mortgages, self-employed people are still relatively lacking in support. However, some lenders such as Bluestone are now taking a more proactive stance to encourage the self-employed, and many mortgage brokers remain very happy to take these customers on.

It has always been more difficult to get a mortgage when self-employed. Lenders prefer the reassurance, predictability and ease of calculation that comes from a regular income, rather than the more erratic, complex incomes (generally) associated with self-employment. The pandemic and lockdown have only amplified these differences, especially as many self-employed people and business owners have been less well-supported by grants and furlough schemes. As a result many lenders further tightened their lending criteria, at least initially. But there are a signs of a shift in the other direction.

A poll in April by Mortgage Solutions found that six out of ten mortgage brokers believe that product availability is narrowing for self-employed borrowers, while criteria are growing more stringent. However, nearly a third thought the opposite, suggesting that opportunities are still out there for those who persist. There are also indications that some lenders are being forced to relax their criteria, to avoid losing their customer base.

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

Why the self-employed get a ‘raw deal’ on mortgages

What’s not in dispute is that the search for a mortgage has become a lot harder for the self-employed. Research by Mortgage Broker Tools (a platform used by mortgage advisers) suggests that almost a third of self-employed mortgages are now effectively ‘unaffordable’, and that the maximum amount such customers can borrow has dropped by 3% since August.

The research also found that over a third of self-employed applicants had suffered at least one mortgage rejection. A comparable study by mortgage broker Haysto found this figure to be smaller, at one in six, but still significant. Paul Coss, co-founder of Haysto, feels that the self-employed get a raw deal, given that often they can boast higher incomes in real terms than people on salaries can. He says, ‘Mortgage lenders tend to prefer people in full-time employment, because it’s easy and simple to understand their income. Being self-employed, your income isn’t as straightforward, [but] people shouldn’t be penalised for that.’ His view is that most mortgage lenders just aren’t willing to handle the extra effort of dealing with complex incomes.

Kaan Emin, a broker at Apply Mortgages, warns that self-employed people who use the government support scheme SEISS (the equivalent of furloughing themselves) may inadvertently harm their mortgage prospects. He says, ‘Most self-employed people of which have taken help from the Government during the pandemic are being disadvantaged by lenders. [They] have to return off furlough and evidence three months of business bank statements to evidence the same level of income they earned prior to the pandemic.’ He suggests that self-employed people should only use schemes like SEISS if absolutely necessary.

But David Baird, a mortgage adviser with Aventur Wealth, offers a more optimistic viewpoint. Although he concedes that Covid has had ‘a huge impact on self-employed mortgages’ and led to increased discrepancy, he says, ‘Personally I have not seen a decline in acceptance rates. Instead it has caused an increase in time taken on my part in researching the right lender for the right applicant.’ In other words, self-employed buyers still have a fighting chance if they can find a diligent mortgage broker who will search the whole of the market for them.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

New opportunities for self-employed homebuyers

Fortunately, some lenders do recognise the difficulties created by Covid, and are adjusting their requirements to reflect this. Leading the way is Bluestone Mortgages, which has updated its credit policy for self-employed applicants. Those who have experienced a drop of 10% or more in business income, but have since restored their earnings to their former levels, can use their 2019/20 as the yardstick both for affordability and maximum loan size. So long as borrowers can provide three months’ evidence of the restored income, it will be treated as the equivalent of a full year for mortgage purposes.

‘We are acutely aware of the hardships that the self-employed community has faced during the COVID-19 pandemic,’ says Reece Beddall of Bluestone, ‘and we remain committed to providing these borrowers with a lending solution that will better meet their needs.’

Shared ownership remains a possible route for those whose home ownership ambitions have taken a knock. This is most commonly offered by housing associations, but private companies are also creating opportunities. One of these is Wayhome, whose CEO Nigel Purves observed that the stamp duty holiday had still left a lot of people behind. He says, ‘Even with the Stamp Duty extension for an extra three months spurring on hopeful home buyers, there are many who find themselves overlooked and ignored due to their household income not meeting a mortgage lender’s criteria. This is despite them already having a deposit saved and being able to afford the equivalent of mortgage repayments in rent each month. More needs to be done to level the playing field and provide people with alternative routes into home ownership.’

Guarantor mortgages are another potential way to persuade a lender to take you on, though it requires having parents or other relatives willing to share the risk. Another, more radical option for self-employed first-time buyers may be to try and ‘weaponise’ the very thing that is keeping them off the housing ladder: namely, the over-inflated housing market. How? Such a move would likewise need the help of willing parents, who fully own their home mortgage-free and are willing to release equity from it to raise money for a deposit. The parents use equity release to take a chunk of money from their own home’s value, which becomes all or part of the deposit for their offspring’s home. So effectively it is an ‘equity transfer’.

Bob Hunt, chief executive of Paradigm Mortgage Services, says he is now seeing ‘a much closer alignment between the equity release sector and that of the first-time buyer.’ At one level the strategy makes a lot of sense – if the problem is down to rising house prices, then rising house prices can be part of the solution. The downside of course is that a lot of value is eroded during the equity release process, so by gifting a child a deposit made of released equity, parents would be reducing that child’s eventual inheritance by a much greater amount. Still, some families may consider it a price worth paying for the reward of home ownership.

Being self-employed does have many advantages, but ease of obtaining a mortgage isn’t one of them. Nevertheless, in the post-Covid market new opportunities are gradually emerging, and mortgage brokers are ready to help contractors, freelancers and business owners take advantage of them, while advising on the best options to choose.

By Nick Green

Source: Unbiased