With many mainstream lenders declining mortgages to self-employed workers, some are turning instead to the specialist market
The following article is written in association with Pepper Money.
With some mainstream lenders declining mortgages to self-employed workers, anxious borrowers are turning instead to the specialist market to try to secure the funds they need. Pepper Money’s Ryan Brailsford explained to Mortgage Introducer about why the lender was prepared to back those who work for themselves.
Self-employment makes up a significant proportion of the UK’s working population. Over four million people are thought to be self-employed, according to the latest census data released by the Office for National Statistics.
Though despite the millions who work for themselves, they are all too often neglected by mainstream high street lenders, according to specialist lender Pepper Money. Its director of business development, Ryan Brailsford (pictured), pointed to the lender’s own study.
“Seventy-seven per cent (77%) of the self-employed people that we interviewed, as part of our Specialist Lending Study, said they expected it to be more difficult to get a mortgage, just simply because they were self-employed,” said Brailsford. “It does seem to be so with the increase in the inquiries that we are receiving.
“They’ve been declined by a mainstream lender - it can because of a simple credit score, sometimes it’s their debt-to-income ratio. They are obviously then very nervous and assume that if they have been declined once, they will likely be declined twice. We’re very aware that we’re often the second lender that people come to in those circumstances. So, we need to act quickly to make up the time they’ve spent going through that journey once. They’re quite anxious to get the answers that they need, which is why service is so important.”
Brailsford defined what sets Pepper Money apart from others in the market.
“We are a specialist lender who is very much there to support those that are underserved by mainstream lenders,” he elaborated. “A lot of the time people hear the term specialist and think of credit file and adverse credit, but there’s a lot more to a specialist lender than that, and one thing that we’re seeing, at the moment, is the number of arguably ‘clean’ customers who need our services. They don’t have a CCJ (county court judgement) recently or anything like that. It may simply be down to the way that their businesses are set up.”
Many banks will go back over three years of accounts to calculate an average income, but Pepper Money does things differently, explained Brailsford.
“Maybe the applicant has had a big jump in income recently, well we take the latest year for affordability,” he affirmed. “So even if they’ve been trading for five years, we’ll always look at the latest year rather than average the last two or three - that’s a strong point for us.
“We also accept people who’ve only got one year’s trading - we don’t need any further industry experience. So, we see a lot of owners of newer startups coming to us for that reason, because we’re happy to take that one year and use their income based on that.”
Brailsford highlighted that 20% of business owners in Pepper Money’s study said their business made over 10% more profit in the last year. Yet, despite earning more, the averaging of their income over several years, often conducted by mainstream banks, can effectively ‘drag down’ their affordability.
“They’re progressing, they’re building their business but then some lenders look three years back,” said Pepper Money’s director of business development. “Affordability can present an issue when it comes to looking at the complexities of their income. Through assessing their accounts manually, we can hopefully pull out a little bit more income to be able to use to support their application.
“For example, we’ll consider pension contributions and private medical insurance payments, so anything that is being paid out of an applicant’s account before their income is derived and is effectively their money. We’re adding it back in so that we can boost the affordability figure that we’re using, and that’s really important at times like these, where we’re obviously in a rising rate environment.”
Pepper Money works closely with its intermediaries and Brailsford offers the benefit of his advice to them.
“If you’re struggling with the affordability of a customer and you’re not confident understanding complex accounts and trawling through them to try to identify additional more income for an application, reach out to a specialist lender’s BDM,” he urged. “It’s what our underwriters are doing every day; it’s our bread and butter. We also hold forums and training sessions on things like accounts and credit files. So, we’re there to help with that.
“Make sure you shout about the fact that you are an intermediary who can help the self-employed because there’s a lot of people searching for that currently, who feel that their circumstances will stop them getting a mortgage. Ensure that those keywords are on your websites and on your social media. There has never been a more important time for customers to sit down with a good intermediary and get advice on their personal circumstances.”
Brailsford reasoned that with the challenges in the market in recent years, from the pandemic onwards, there are many reasons why a customer could have briefly suffered a dip in income.
“Sometimes you find self-employed customers have the odd blips here and there, sometimes they’re business related, sometimes they’re not,” he noted. “They’re busy people, by definition, so often with those little blips on the credit file which may have brought them to us, we can very quickly see it’s not because they’re struggling, it’s because they’ve not had the time to keep up with their admin.
“We don’t credit score at all, so there aren’t any system-led decisions at all, in our underwriting processes “It is all individually underwritten by human beings, which allows us to take a much more individual approach on every case. It certainly helps us when we’re assessing things like credit files for adverse credit, but it absolutely helps with understanding complex incomes, looking through accounts, things that you couldn’t expect a computer to do.”
The profile of Pepper Money’s customers certainly bears out its support for the sector. Twenty-five per cent (25%) of its completions are for self-employed customers - who variously range from limited company directors to sole traders - compared to 17% in the wider market.
“A lot of people who were unfortunately made redundant during the pandemic came out the other side as self-employed,” reflected Brailsford. “It seemed like a very natural time for people to think, if they had always wanted to set up their own business, now was the chance.
“As an industry, do we need to get better at supporting self-employed people? Yes, I think we do need to get better at individually understanding complex incomes and, in the mainstream market, not simply scoring people down for being self-employed versus employed.”
He concluded: “There is a very large gap between the beliefs of the customer about what they can achieve financially and what the reality really is. There are a lot of self-employed customers who believe they can’t get a mortgage, but if they sit down with the right broker, they absolutely can. At Pepper Money, we’re set to strongly support the self-employed.”
