Self-employed mortgage customers – a growing market segment

Self-employed specilaist lending market

Self-employment has increased significantly since 2008, reaching a record high of 4.6 million in 2015.  This is an extension of a trend started in the early 2000s.

Most self-employed people choose to be so because of the freedom; currently around one in seven are self-employed in their main job. The prevalence of self-employment varies across the country; it is higher in the south than the north. London has the highest proportion of people who are self-employed, while the North-East has the lowest.

Although the number of self-employed people has increased, this market segment has found it difficult to access competitive mortgage finance in recent years. Prior to 2008, ‘self-certification’ or ‘self cert’ mortgages were available, where borrowers didn't have to prove their income using payslips or bank statements, instead the lender assessed the customer based on what they said they earned and applications were often ‘fast-tracked’ through with relatively few checks being made. Following the credit crisis, self-cert mortgage lending ceased in the UK.

Professional mortgage advice

Nowadays, self-employed borrowers tend to seek advice from professional mortgage brokers who are well-placed to assist the them in obtaining a mortgage. Specialist lenders such as Vida Homeloans assess each individual on their own merits using specialist underwriters, supported by modern technology, rather than the ‘computer says no’ approach often associated with mainstream lenders.

The number of mortgage products on offer for this type of customer has reduced dramatically, as the market was previously dominated by self-cert offerings. Now brokers need to prove the income of their client to any mortgage lender they apply to. Most lenders will want to see at least two years’ accounts or tax returns, whereas specialists like Vida will accept 12 months’ trading. However, the more years’ accounts that brokers can show the lender the better and the more likely it is that their client will obtain the best outcome.

When lenders determine how much to lend, calculations are generally based on the average profit over the past few years. Some mortgage lenders including Vida will consider applications if clients have recently left employment to work as a contractor in the same industry or if they have evidence of similar work lined up for the future.

Market forces

Experts predict that 2017 will see little or no growth in house prices, given the ongoing uncertainty of the UK’s departure from the European Union. This follows 2016’s measures by the Government to cool the Buy to Let market. Many estate agents and surveyors have reported that large numbers of buyers and sellers have withdrawn from the market and that the number of homes on estate agents’ books remains low. 

Figures from HM Revenue & Customs show transactions surging in March 2016 before higher stamp duty rates were imposed on second homes, but levels have now fallen to lower than in 2015. In August, for example, 96,720 sales were registered, compared with 104,280 a year earlier.

In terms of self-employment, there are positives and negatives associated with Brexit for this group of people. Firstly, the positives are that contractors in particular may find themselves in more demand than ever, as businesses capitalise on the flexibility contractors bring to ensure the UK’s economy doesn't suffer in times of financial uncertainty.

The negatives are the proposed change to the IR35 regulation which make it harder for contractors to claim that they are not ‘hidden employees’ and therefore should not be taxed as if they were employed. Many pundits believe that the Government’s proposed changes could be dropped completely as a result of Brexit. 

Every public sector body has a huge task ahead of them so now may not be the time to enact any IR35 changes in the public sector. As a result of any increased taxation burden, contractors falling foul of the new legislation would probably have to put their rates up, which would have a negative impact on organisations who are still trying to recover from the credit crisis.

Top tips to target the self-employed borrower

Brokers should gather as much evidence of their client’s financial affairs as possible. The further back they can go in producing accounts that show solid and consistent financial performance, the better deal they will be able to obtain for their client.

Secondly, brokers should focus on presenting the case transparently to the lender. There is no point in glossing over something that an experienced underwriter has seen many times before. When a broker advises a self-employed client on the options available from the market, they are his or her chief negotiator. So for a deal that suits all parties, it is wise to build trust and rapport with the mortgage lending officers and underwriters during presentation of the case.

Finally, brokers should attend seminars and workshops and keep reading communications from self-employed mortgage lending specialists. Keep building knowledge of this sector; who might lend on 1 year’s accounts or SA302? Who will accept impaired and improving credit records? Which lenders offer interest-only? Only by continuing to develop specialist knowledge of the whole market will brokers be able to find the best solutions for their clients’ mortgage needs.

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