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.
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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.
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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