Great Britain has long been renowned as a nation of small businesses. Indeed, official statistics suggest that around 14% of Brits are registered as self-employed.
There is no shortage of selling points to this form of work, particularly coming so soon after the pandemic. Working for yourself means greater flexibility over when you work and the jobs you take on, meaning a greater work/life balance.
However, as brokers likely know only too well from their own experiences, there can be some real downsides, not least the potential difficulties when looking to take out a mortgage.
The most recent Specialist Lending Study published by Pepper Money highlighted the concerns of self-employed borrowers. More than three quarters stating they believed that being self-employed made it more difficult to be approved for a mortgage.
These worries are not unfounded, either. The truth is that some lenders look unfavourably on self-employed borrowers, putting particularly challenging hurdles in the way of their borrowing hopes.
Assessing affordability
A good example here is the way that lenders approach mortgage affordability. It is absolutely right that lenders of all kinds ensure that would-be borrowers could afford any home loan they are looking to take out, regardless of whether they are a regular employee or run their own businesses.
That is at the very core of being a responsible lender.
However, those calculations can be overly punitive for some borrowers. It’s all too common for lenders to base their affordability assessments on the average profits over the last three years. That can be a high bar to pass, given the difficulties businesses – even those that are particularly successful – have faced challenges over those three years.
Most businesses were impacted by the pandemic, which is why the support from the government was so gratefully received.
That impact was particularly felt on profit levels; many self-employed workers will have found that their profits in the last year were significantly stronger than over the previous two years.
In fact, our research found that one in five self-employed workers say their business made over 10% more in profit in the last year than they managed in the previous two years.
Because of affordability being assessed in this way, self-employed customers can find themselves in a tight spot. It may be that lenders are unwilling to lend a sufficient amount for the customer to go through with their planned purchase, though in the worst case scenarios the customer may find they are unable to get a mortgage at all.
This is grossly unfair; the business may be thriving today, with a reliable and consistent level of business in the pipeline, yet the customer’s hopes are dashed because of the understandable impact of the pandemic on its profit levels two years ago.
It doesn’t have to be like this. Lenders who truly understand this area of the market, and are genuinely committed to supporting self-employed borrowers, are more likely to take a flexible approach. At Pepper Money for example we are happy to lend against the last year’s results.
Doing more for the self-employed
The self-employed are a significant and important subset of borrowers in the UK mortgage market, but there’s no question that they can face additional hurdles when trying to access mortgage finance. The truth is that some lenders are simply too wary of lending to them at all.
However, at Pepper Money we know that by viewing self-employed borrowers as individuals, and taking the time to understand their specific case, we can make a more informed decision on their application.
Lenders who adopt this sort of approach can be more flexible, and assess a case based simply on the most recent year’s figures rather than needing an average of the previous three years.
Mortgage brokers are important allies of all kinds of mortgage borrowers, but they are particularly valued by self-employed customers. As our study shows, many of these workers are only too aware of the challenges their employment status can present when obtaining a mortgage, and so it makes sense that they would turn to a broker in order to help them clear those hurdles.
We know from our conversations with brokers that flexibility from lenders is highly valued by brokers and customers alike. The specialist approach, where cases are assessed on their own merits rather than being damned by a tick box system, can also make all the difference for self-employed customers and their borrowing aspirations.
You can find out more information on how the current economic environment is impacting the attitudes and behaviour of the nation’s households by reading the latest Pepper Money Specialist Lending Study. This study is our most extensive primary research to date and takes a broader, detailed look at the views and impacts of mortgage customers, covering the cost of living crisis, adverse credit, self-employed and first-time buyers.
Download your copy of the study now at: https://www.pepper.money/intermediary/specialist-lending-study
Rob Barnard is director of intermediary relationships at Pepper Money
