When it comes to obtaining mortgage financing, independent borrowers have always faced a number of additional hurdles compared to their salaried counterparts.
But this disparity has worsened since the Covid-19 pandemic. Given the recent rise in house prices, extensive affordability calculations, lingering economic uncertainty, and a health crisis that has yet to be resolved, brokers expect the landscape for independent borrowers remains difficult for some time.
The challenge, from a credit standpoint, has always been to determine whether the reported information on the income of the self-employed gives a true and complete picture of an individual’s situation – and whether that income will be sustained in the future. ‘to come up.
People on leave were often treated much better than those who were self-employed
Virtus Private Finance Director Sebastian Riemann said: “This assessment is good because it is quite easy to predict general trends, but throw a curve ball the size of the Covid pandemic and you end up with some companies in difficulty while others are doing much better.
“The hardest part then is to predict whether this recovery or decline is temporary or likely to continue once the dust settles. From a lender’s perspective, an already difficult valuation is made much more difficult and the risk is magnified.
Self-employed borrowers generally may not be penalized on the rate, but most will need to meet additional criteria compared to PAYE borrowers and will need to provide additional evidence to verify their income. Lenders have become more cautious on both fronts since Covid.
Brokers say this means self-employed people face a longer application process, with many cases needing to be taken out individually.
Many lenders are now looking to relax their criteria to allow the continuation of self-employed loans
The situation was further complicated by the different levels of government support available to those whose incomes were affected by the pandemic and the economic bottlenecks that followed.
While there was generous government support for salaried workers, through the leave scheme, assistance for independent borrowers has been slower to emerge and has, in some cases, been less generous.
Riemann says: “It is evident that people on leave were often treated much better than those who were self-employed who suffered a reduction in their income during the same period. “
He says the support available, through specific grants and loans, has not always been viewed favorably by many lenders.
The general public won’t ignore the self-employed – there is too much business for this to happen
L&C Mortgages associate director David Hollingworth agrees. “The leave program has helped many salaried borrowers keep their heads above water, allowing them to demonstrate continued income with a good degree of certainty.
“Self-employed workers eventually received support, but they had to provide more evidence to be able to convince lenders that incomes were not too affected by the foreclosure and the Covid disruption,” he said.
For the self-employed, the main vehicle for government support has been SEISS grants. But while many of those receiving paid time off have returned to work, lenders have been cautious about the assumption that self-employed income levels will automatically return to pre-pandemic levels in the current climate. . As a result, there has been growing reluctance to lend to those who have accessed this support.
Hollingworth says, “The use of SEISS grants has become less straightforward over time, and some lenders have been reluctant to use business income in mortgage applications if the grants have been used up after some time.
Lentune Mortgage Consultancy Managing Director Stuart Gregory said, “Adjustments made by lenders include asking additional questions at the start of an application, especially regarding any government support taken.
I don’t see, at least in the short term, that lenders will relax these additional controls.
“To qualify for this support, companies had to declare that they had suffered from a drop in their level of activity. Lenders want to make sure these businesses are able to return to similar income levels to pre-Covid.
“On this basis, many lenders ask for evidence that the business involved is still in business and at levels similar to their last full year of business accounts, or in accordance with the most recent annual income tax return. “
As a result, it’s now becoming common for traditional and specialty lenders to request at least three months of business bank statements to support a mortgage application, he says.
Gregory adds: “I don’t see, in the short term at least, that lenders will relax these additional controls.
Hollingworth says this more individualized approach has had an impact on service, with freelancers facing substantial delays at peak in demand.
At the start of the pandemic, lenders took a more cautious approach to lending with employee and self-employed borrowers. But while many lenders have now relaxed some of these restrictions for salaried borrowers, it has yet to filter through the self-employed market.
For example, Riemann says that at the start of the pandemic, many providers reduced the earnings multiples they lent to and stopped including bonuses for job applications.
Halifax only allows PAYE access to 5.5 times income, and TSB caps it at 4.49 times income for all self-employed
“The restrictions on bonus payments started to be reversed from the end of 2020 and early this year,” he said. “But the self-employed have had to wait much longer to see their offer revert to previous levels, and many lenders still impose tight multiples to this day.”
This is not made easier by the fact that there is often a time lag, with self-employed workers reporting their income up to a year later via self-assessment statements, he says. In many cases, these are only now showing the full impact of the Covid losses.
However, some brokers report that lenders are starting to turn to independent borrowers again, especially in the mainstream market.
Adjustments made by lenders include asking additional questions at the start of a request
SPF Private Clients Managing Director Mark Harris said: “Underwriters were very forensic at the start of the pandemic and, even when independent applicants could demonstrate that their business was unaffected, they found themselves caught. in the comprehensive approach of high street lenders with reduced loan-to-income and loan-to-value ratios.
“But now the tide has turned. Lenders are looking at recent three- to six-month swaps and comparing them to pre-pandemic levels. “
Approaches differ from lender to lender, and much will depend on whether borrowers accessed the assistance and on what date. Harris says Santander, for example, will not accept the request for which government aid was taken in the past three months. If the aid was taken before that date, any repayments in this regard will factor into affordability.
On the other hand, he points out that the Bank of Ireland will use the income from the past year in isolation, provided it is supported by evidence of recent business activity to confirm that the level is sustainable. This goes through the bank’s tailor-made proposals.
Harris says, “This underwriting approach will help independent applicants who have recovered well over the past year or who have maintained good trades throughout the pandemic. “
Brokers will seek realistic approaches from all lenders as we emerge from the effects of the pandemic
Harris adds that some lenders still penalize independent applicants over those with a job.
“Halifax, for example, only allows access to PAYE at 5.5 times income, and the TSB caps it at 4.49 times income for anyone who is self-employed.”
Nationwide says independent borrowers can apply for any of its mortgage products up to 85% LTV, and the same rates and fees apply as employee borrowers. However, independent applicants will continue to be referred to underwriters who will confirm on a case-by-case basis whether they require additional evidence to support such claims.
Hollingworth says that given these additional restrictions, this is an area where specialists can gain market share from traditional lenders. It is clearly possible to offer loan solutions to those with less history of self-employed income, or those who are on the road to recovery but do not have enough documentation to prove it.
Lenders such as Precise, Kensington, Pepper and Bluestone are already making sensible proposals for this target market, he says.
Hollingworth says: “This doesn’t mean the general public will ignore self-employed workers – there is too much business for this to happen, and many are now looking to relax their criteria to allow self-employed workers to continue to lend. “
Leave plan has helped salaried borrowers achieve continued income
However, he expects the specialist sector to increasingly play a key role.
“Of course, the more a solution is required, the more likely the impact is to impact the rate, so brokers will seek realistic approaches from all lenders as we emerge from the effects of the pandemic,” said Hollingworth.
This will continue to open up opportunities for the broker market, he says, not only in finding these more specialized solutions, but also in working with clients to understand their business and income in order to present a viable case to lenders. .