Are the Self-Employed Being Penalised by High-Street Lenders?
4 minute read
According to the Office for National Statistics, the number of British people who are self-employed is at its highest level in 40 years. This is also borne out by the findings of the Resolution Foundation, who reports that the UK’s self-employed workforce has grown by 45% since 2001–02. The Foundation’s economic analyst, Adam Corlett, reckons that almost five million people are self-employed, representing about one in seven UK workers, or around 15 percent of the workforce. There are a number of reasons for this, including companies who are pushing permanent workers to be contracted; people who can’t find permanent work and so become self-employed; and, of course, those who make the switch as a planned career choice. But what are the implications for those self-employed people who want to get a mortgage?
High-street lenders need to catch up
While there are certainly specialist brokers and lenders who see the rise in self-employed people as an opportunity and are looking for ways to understand and accommodate their particular borrowing needs, high-street lenders don’t yet seem to be viewing things in the same way. Mainstream banks and building societies are consistently cautious – some would say overly cautious – when it comes to lending to the self-employed. Dermot Campbell, head of the investment company Kuber Ventures, has said: “My employees have zero issues getting a mortgage. Yet I can’t get reasonable terms.” The obstacles people face include being asked for several years’ worth of accounts, and/or to have a proven track record as a contractor or freelancer, whereas a permanent employee applying for a similar mortgage – who could be made redundant by their employer tomorrow – generally has only to provide three months’ worth of payslips. One issue is that a self-employed person’s income can be variable, and high-street mortgage advisers are typically more used to dealing with employed people than those who are self-employed; they simply don’t have the experience to assess an application within the current – and arguably rather narrow – underwriting framework as their usual terms of reference don’t apply.
Proving your income
Since self-certification mortgages – based on your declared but unproven earnings – are now well and truly a thing of the past, it is necessary to provide actual proof of your contractor or freelance income. There are a couple of options self-employed mortgage applicants can use, depending upon how they operate their business. In the case of a limited company, most lenders will accept annual accounts provided by a chartered accountant. For those who submit an annual self-assessment tax return, many lenders now accept a form SA302, which is a summary of income as declared to HMRC and shows personal earnings: salary and/or dividends, plus any other income. An issue for the newly self-employed is that lenders often look for three years’ worth of income via these methods, and if you’ve only been going for a year – or less – you may experience difficulties. More specialist lenders may have less strict requirements – for example just one year’s accounts – if your income/affordability and credit score are otherwise good – or working off your current daily/weekly rate if a contractor. Some self-employed mortgage applicants may also run into problems if they have been aiming to maximise tax-efficiency in their business – keeping profits within the company structure rather than drawing them as taxable income. To lenders with less experience of underwriting applications from limited company directors, contractors and freelancers, this “low-income” applicant might look less well off than they actually are, potentially reducing borrowing capability. Cautious lenders may also ask for a bigger deposit – for example, up to 25% – in order to restrict their exposure to risk should the borrower default on a loan.
Times of change?
While there are some signs of mainstream lenders becoming more receptive to self-employed applicants, there’s still a long way to go before high-street lenders view the self-employed in the same light as those in permanent employment – and the fact that the latter may actually be employed by the former is an irony that’s hard to ignore. The good news is that there is a growing range of contractor and freelancer mortgages on the market, many from more specialised niche lenders who understand that a lot of self-employed people are in fact high-earning, tax-efficient professionals, entrepreneurs and business owners, rather than the risky lending proposition they’re too often regarded as being. If you are self-employed and looking for a mortgage, contact us to discuss how we can help find the deal that’s right for you.