Historically speaking, self-employed borrowers have faced an uphill battle when it comes to securing a competitive mortgage. This is often put down to the irregular and sometimes erratic nature of their income streams which has resulted in many mainstream mortgage lenders viewing them as a ‘riskier’ entity.
This perception can be even more disheartening in the wake of rising living and borrowing costs which are placing an even greater strain on household incomes and affordability calculations.
Given the continued fluctuations in the money markets, it’s unlikely that these challenges will disappear any time soon. The fall in inflation has been slower than expected, and while there are glimmers of hope that we could end the year in a better position than how we started, there remains some trepidation around where the market is heading over the next few months.
For brokers with self-employed clients, this means it’s never been more important to understand the options available when catering to the needs of this demographicand recognising the flexibility of specialist lenders when looking to place this type of business.
This area of the mortgage market has been catering to the needs and complexities of the self-employed for decades and understands all too well that no two borrowers are the same. This is why we, as a lender, individually assess and underwrite each mortgage application we receive.
Specialist lenders design their criteria with non-mainstream clients, such as the self-employed, in mind as it allows them to adapt and tailor products to meet the needs of individual applicants. All within responsible lending boundaries of course.
For example, some lenders may consider the most recent year’s accounts rather than an average over two years when applying for a mortgage, which can prove helpful in cases where income may have been hampered by the pandemic.
This means that in cases where a client has reported a net profit of £20,000 in 2021 and a net profit of £35,000 in 2022, the higher net profit could be considered in affordability assessments, provided it can be verified by an accountant.
They may also consider the latest year’s salary and dividends or the salary and net profit as opposed to the average of two years, although clients usually need to have been trading for a minimum of two years in these cases.
Here at The Loughborough, we have the ability to lend up to 5.5 x income. This is on the proviso that someone earns over £50,000 as a sole applicant or £75,000 as a joint applicant. And this is a facility which can help increase borrowing potential as the latest year’s salary and net profit – as opposed to an average, which may be lower – is considered.
In cases where self-employed applicants are transitioning from being a sole trader to a limited company, some lenders also have the ability to accept the application without “resetting” the period of time they’ve been self-employed, provided they’ve been trading for a minimum of three years and have the accounts to prove it. Therefore enabling them to secure a mortgage sooner.
Similarly, in cases where an employee is transitioning from being employed to self-employed within the same firm, the net profit of the business which has been trading for five to 10 years could be considered, even if the applicant has only been a director for one year. Although it’s important to note that a P60 to show previous employment is usually required.
The examples above show that the needs of self-employed borrowers can be vast and varied and understanding how to cater to these clients in the current marketplace has never been more critical for advisers across the UK. Thankfully, a range of solutions are accessible and available if they know where to look.
Ashley Pearson is national BDM at the Loughborough for Intermediaries