Self-employed workers across the UK are havingto fight hard for mortgage approvals to purchase new homes after facing a wave of rejection for loans during the pandemic.
Many now believe that even as lockdowns ease, conditions for buying a property as a self-employed worker are deteriorating, according to new research by Aldermore Bank.
Two in three self-employed workers believe mortgage lenders treat them worse than those who are employed with a regular salary.
Many self-employed workers feel high street lenders do not give them a fair hearing when going through the application process.
Over half think mortgage lenders do not do enough to support the self-employed and many feel high street lenders do not give them a fair hearing when going through the application process.
Nearly a quarter claimed their mortgage lender did not understand their earning capabilities at all.
The most common reason for mortgage rejection was the mere fact of being self-employed, according to Aldermore, with a third citing this as a reason for their rejection.
Self-employed workers have arguably always faced more scrutiny from lenders, typically having to produce two to three years of tax returns as opposed to just one to three months’ payslips for salaried employees as evidence of income.
But because of the pandemic, many self-employed workers feel that their chances of securing a mortgage have diminished further.
Alex Winn, mortgage advice team lead at Habito said: ‘Many self-employed applicants including sole traders, freelancers and entrepreneurs have had a very challenging time over the past 18 months and those in the hospitality and travel sectors are finding it harder than ever.
‘Some lenders want to see business levels over the last three months returning to previously declared and earned levels – which for some is taking time as the economy recovers.
‘Lenders also have varying opinions on how to treat applicants who have taken government support or grants during the Covid pandemic.’
In some cases, self-employed workers who have used the government’s self-employment income support scheme (SEISS) will not even be considered for a home loan.
Two major lenders, Natwest and Royal Bank of Scotland are refusing to consider mortgage applications by anyone who has used the government’s SEISS.
A spokesperson for Natwest said: ‘As it stands, we aren’t accepting applications from customers who have applied for an SEISS grant on or after 14 July 2020.’
Lenders such as HSBC, Metro and TSB, require evidence that a person’s business has recovered from the pandemic.
A spokesperson for Metro said: ‘A review of the last six months of business bank statements is undertaken to establish current trading levels and ongoing sustainability.’
A spokesperson for HSBC added: ‘We ask for either the January, February or March 2020 business bank statements and the last 60 days’ worth of business bank statements of which the latest date showing on the statements must be within a week of the application date.’
In some cases, lenders are demanding higher deposits or equity from self-employed workers.
For example, Nationwide requires a minimum deposit or equity of 15 per cent from self-employed workers, whilst for a Santander mortgage, a self-employed worker needs to stump up a minimum of 25 per cent to be considered.
Some lenders require self-employed workers to have bigger deposits than salaried employees in order to secure a mortgage
Metro Bank says it will consider those who have used the SEISS, but that it will require a 20 per cent deposit from those who have done so.
A spokesperson for Metro Bank said: ‘Any self-employed customers who have taken out the SEISS grant are limited to a maximum loan-to-value of 80 per cent and will therefore require a minimum deposit of 20 per cent.’
The maximum a self-employed person can borrow compared to a salaried employee is also being limited by some lenders.
For example, TSB’s maximum income multiple for self-employed workers is 4.25x income, whereas income multiples for ‘non-self-employed’ with and a total income in excess of £40,000 can benefit from an income multiple of 4.75x.
Self-employed workers are also being subjected to longer wait times and more rigorous checks, given the past 16 months.
A Barclays Bank spokesperson said: ‘Mortgage applications from self-employed applicants are manually assessed by underwriters. This process can take longer than applications from employed customers.’
A Nationwide spokesperson added: ‘As a result, the impact of Covid-19 means that underwriting mortgages for self-employed borrowers is much more complex than before as a result of the difficulties in being able to fully assess long-term affordability in these uncertain times.
‘As such, it may take slightly longer to reach a lending decision and additional information and documentation may be requested.
‘We use the lower of the most recent year’s figure or the average of the last 2 year’s figures in our affordability assessment.’
Whilst this may spell doom for those whose businesses have struggled during the pandemic, there is less reason to worry for businesses that have since recovered.
Chris Sykes, a mortgage consultant at Private Finance said: ‘Some lenders do still have restrictions around the self-employed, from offering lower loan to values to altering their affordability calculations across the board for self-employed.
‘Generally, for a self-employed person, if your business has re-opened and you can show 3-6 months of bank statements showing a return to pre-covid business levels and have good justifications around any grants or loans you have taken during the pandemic then there are options available to you.’
Why are lenders being so harsh?
Banks and Building Societies will argue that the tougher measures are all part of lending responsibly in uncertain times.
‘It is somewhat understandable,’ said Sykes, ‘the world has changed, and lenders do not want to offer self-employed mortgages to then find out 24 months down the line that those businesses were actually struggling and are unable to perform at pre-covid levels due to the environment for business changing.’
‘If they did this, I’m sure the FCA or PRA would have something to say about it being irresponsible lending.’
Self-employed workers may, however, argue that ‘responsible’ lending should subject salaried employees to the same restrictions and checks.
Where can the self-employed turn to?
Some Building Societies have been extending help to those who are self-employed, contractors and on furlough, according to Saffron Building Society.
Saffron, claim that along with many other societies, it has improved the number of people assessing and underwriting to allowing each applicant a chance to tell their individual story and make a case for their acceptance.
John Penberthy-Smith, chief commercial officer at Saffron Building Society said: ‘Whilst it is true that many high street banks and larger lenders have tightened their application process for self-employed applicants, that is not true of all lenders.
‘Working closely with brokers, we have accepted many self-employed as our underwriting and intermediary team work closely during the application to get as much detail about their individual situation as possible.’
The advice, however, is first to speak to a mortgage broker rather than going directly to any lender, even if it claims to be a self-employed specialist.
‘My advice is to speak to a broker as they will be able to run through your full circumstances with you and judge what is available now versus if you wait a few months,’ said Sykes.
‘I wouldn’t recommend going directly to specialist lenders and regional building societies as you may end up paying much higher rates costing you tens of thousands in the long run.’