They require extra care in approach to applications
“Self-employed borrowers should not be something that is seen as a specialist area,” according to David Hollingworth (pictured), associate director of communications at London & Country Mortgages.
Hollingworth explained that self-employed cases do require extra care in the approach to ensure the application will be accepted by the lender, but he believes this does not justify this area of the market as being classed as specialist.
“Self-employed borrowers will largely have access to the same mortgage products as an employed borrower, but issues will tend to manifest themselves in the evidencing of the borrower’s income,” Hollingworth said.
The self-employed are more restricted in what mortgage products they can access due to the increased risk with their payment structures. Given the natural, likely fluctuation in income, lenders will typically expect to see at least a couple of years’ track record to demonstrate income.
“That in itself can therefore be problematic for those borrowers that have more recently gone self-employed, and may only have completed one full year of trading,” Hollingworth added.
Read more: How has the pandemic affected self-employed mortgage applications?
Pandemic impact
The COVID-19 pandemic brought about significant challenges for the self-employed given the potential for severe disruption to their income stream.
“However, many of the COVID-related criteria changes have been unwound now that the economy has emerged from the pandemic,” Hollingworth said.
Though the effects of the pandemic are beginning to dissipate, Hollingworth believes that the emerging cost-of-living crisis will have its part to play in tighter criteria for all borrowers, including the self-employed, going forward.
He also believes the war in Ukraine has and will continue to impact on affordability, with energy prices rising as well as fuel prices; both expenditures are not easy to cut down on, and therefore Hollingworth explained will likely have a substantial impact on a self-employed borrower’s affordability.
Changes for lenders
According to Hollingworth, while there have been increased pressures on self-employed borrowers, lenders have also had to adapt to the changes.
He outlined that banks and building societies have had to carefully consider how they would deal with self-employed cases, given affordability must be sustainable.
“As a result, lenders added to their requirements to get a better feel for a borrower’s current level of income, typically through the provision of business bank statements,” he said.
The huge demand during the pandemic and the increased amount of individual underwriting meant that processing took longer and, because of this, some lenders took a step back from higher loan-to-value (LTV) lending.
Read more: Number of 75% and 95% LTV products drop by close to two-thirds
Demand was kept afloat through the introduction of the Stamp Duty Land Tax (SDLT) holiday, however, as affordability was stretched for the self-employed and lenders alike, many lenders temporarily pulled out from the market in order to reassess their own financial standpoint.
Indeed, the after-effects of the tax holiday has left house prices at an all-time high, reaching £271,613, with average prices increasing by over £26,000 in the past year, which Hollingworth said will impact first-time buyer self-employed applicants the most.
“All these issues are why an adviser is likely to be an essential part of the process for many self-employed borrowers,” he said.
“Although the message should be clear that mainstream products will often be an option, those concerned that they will not fit the high street mould should also be left in no doubt that options exist with specialist lenders prepared to take a more tailored approach for the right borrower.”
