Kensington Mortgages is introducing a new policy for self-employed customers, with affordability taking into consideration a company director’s share of net profits in addition to their salary.
The mortgage, which is launched on Monday (22 June), is available to sole company directors and their partners. It is designed to reflect the true earnings of successful entrepreneurs who choose to keep some profit in their business rather than draw it all down as salary.
The lender argues that its move will help expand options for the UK’s 4.5 million self-employed in a market which has struggled due to restrictions on lending to borrowers who are not in full-time employment. Kensington’s own research among brokers shows 37% say self-employed borrowers struggle to prove their income compared with just 3% of employed customers.
It is common practice for many small business owners to take only the salary they need in order to be tax efficient. But while leaving profit in their business is a good way to strengthen the balance sheet of their company, it can also reduce their chance of getting a mortgage. The vast majority of lenders will only consider salary and dividends when assessing the affordability of self-employed customers and yet Kensington will consider both profits and salary based on a customer’s previous year’s accounts.
Keith Street, head of Kensington, said: “In 2009 Kensington launched an approach to self-employed lending based on reviewing the last 12 months accounts, which meant that entrepreneurs no longer had to wait for three years to get a mortgage.
“But we know that there is more we can do to help customers in this vital sector. We recognise that for many directors of small companies, salary and dividends on their own are not a true reflection of their income and affordability. Which is why we can now make affordability assessments taking into consideration a company director’s share of profits in addition to their salary.
“This is a significant step in the way we approach lending to the self-employed and it is just one of the ways that Kensington is reacting to the shifting employment trends amongst our customers to ensure we are able to make responsible decisions without penalising those customers who do not fit a standard mould.”
Ray Boulger, senior technical manager at John Charcol, said: “It is really encouraging to see we are at last getting a few criteria improvements in the market, especially for the type of borrower who has been disproportionately affected by tighter lending conditions and regulations over the last few years.
“This criteria enhancement will be warmly welcomed by brokers and their self employed clients and should help some of the mortgage prisoners. Some may now even be able to think about moving home!”