15 Feb Computer says no!
Why the self-employed now find it so hard to find a mortgage – and seven key tips to help secure lending.
There was a time when getting a mortgage as a self-employed worker was simple. Indeed, some lenders were happy to grant a loan without seeing any evidence of earnings.
Although such ‘self-certified’ mortgages were banned six years ago, many lenders have now gone to the other extreme.
Conscious of a regulator keen to clamp down on reckless lending, they are nervous about lending to the self-employed.
Rather than ‘We say yes’, the common response from many lenders to enquiries from the newly self-employed is: ‘The computer says no.’
New affordability rules introduced by the Financial Conduct Authority are to blame. They mean some lenders will only entertain the self-employed if they can provide at least three years of accounts or three years of income that has been reported to Revenue & Customs (via a form called SA302).
The mechanistic way many big lenders now process mortgage applications means that those made by the self-employed are routinely spat out.
The decision on whether to lend is taken by an insensitive computer located on some industrial estate in the middle of nowhere, not by an employee working out of a bank or building society branch who has discretion over lending decisions.
Only a few specialist lenders and a handful of local building societies are happy to lend to the self-employed without resorting to a computer, assessing cases on an individual basis.
It means many people setting up in business can find themselves excluded from getting a home loan.
If they already have a mortgage, they can find remortgaging nigh-on impossible. In most cases, they have no choice but to stick with their existing lender irrespective of how competitive their products are.
David Hollingworth, mortgage expert at broker London & Country, says the reluctance of lenders to accommodate the newly self-employed can feel like a ‘lockout’ for those searching for a loan.
Although he believes some lenders, especially new challenger banks, are adapting their lending to take into account the labour market’s shift from employment to self-employment, they are not adapting quickly enough.
Research by challenger bank Aldermore indicates that worries over getting a mortgage are holding back some people from becoming self-employed.
Though one in seven workers would like to be self-employed, one in ten fear that they would struggle to get a mortgage if they made the jump, so putting them off.
Charles Haresnape, director of mortgages at Aldermore, says: ‘As the self-employed market grows, more needs to be done by lenders to support their needs.
IT’S NOT EASY…EVEN WHEN YOUR BUSINESS IS A SUCCESS
‘All too often these borrowers do not fit the norm for high street lenders and it can be a real challenge for them to receive the financial support they need to buy a home.’
He adds: ‘This has to change. Self-employment now accounts for 15 per cent of the country’s employed market and this figure is going to grow. Lenders must move with the times.’
Aldermore, which is happy to lend to the self-employed, now only requires applicants to show one year of accounts – it was previously two. It is among a select band of lenders which experts describe as self-employed friendly.
Others include specialists Kensington, Paragon, Precise and Vida and building societies Coventry, Ipswich, Leeds, Market Harborough, Newcastle and Saffron. Clydesdale, Kent Reliance, Metro Bank, Platform (Co-operative Bank) and Virgin will also lend.
Ray Boulger is senior technical manager at mortgage broker John Charcol. Apart from the need for accounts, he says the self-employed face other challenges, irrespective of how long they have been trading.
‘No two lenders are the same,’ he says. ‘For example, those people who trade as a company may have a loan application assessed purely on the salary they are drawing from the business plus any dividends they pay themselves.
This can discriminate against those who opt to keep the bulk of their profits in the business in order to grow it. Flexible lenders will take retained profits into any lending decision.’
A recent blip in profits may also cause some lenders to say no. Accommodating lenders, says Boulger, will be happy to accept a mortgage application if this blip has been caused by a ‘non-recurring event’ such as a large bad debt or someone taking time off after the birth of a child.
Those who have just been made a partner after being employed in a business such as an accountancy firm, a solicitor’s or a GP practice can also come unstuck. This is because a lender can treat them as if they were newly self-employed.
Finally, those who generate a lot of their business revenue in a foreign currency can find the choice of lenders restricted. This is because a recent EU directive means any mortgage is treated as a foreign currency loan.
‘As far as the self-employed are concerned, it’s a mortgage minefield out there,’ says Boulger. ‘It can be navigated but it is not easy.’