Self-employed workers in the UK are fighting hard for mortgage approvals to buy new homes after being hit by a wave of loan rejections during the pandemic.
Many now believe that even as lockdowns ease, conditions for self-employment will worsen, according to new research from Aldermore Bank.
Two out of three self-employed workers think that mortgage lenders treat them worse than employees with a fixed salary.
Many self-employed people feel that lenders do not give them a fair hearing when going through the application process.
More than half believe that mortgage lenders are not doing enough to support the self-employed and many feel that major lenders do not give them a fair hearing when going through the application process.
Nearly a quarter claimed that their mortgage lender did not understand their earning abilities at all.
According to Aldermore, the most common reason for mortgage rejection was simply because they were self-employed, and a third cited this as the reason for their rejection.
The self-employed have arguably always had more control over lenders, typically requiring two to three years of tax returns rather than just one to three months of paychecks for salaried employees as proof of income.
But due to the pandemic, many self-employed people feel that their chances of getting a mortgage have decreased further.
Alex Winn, Mortgage Advice Team Leader at Habito, said: “Many self-employed individuals, including sole traders, freelancers and entrepreneurs have had a very challenging time over the past 18 months and people in the hospitality and travel sector are having a harder time than ever.
“Some lenders want business levels of the past three months to return to previously declared and earned levels – which is taking time for some as the economy recovers.
“Providers also have differing views on the treatment of applicants who have received government aid or grants during the Covid pandemic.”
In some cases, self-employed workers who have made use of the state income support scheme for the self-employed (SEISS) are not even eligible for a home loan.
Two major lenders, Natwest and Royal Bank of Scotland, are refusing to consider mortgage applications from anyone who has used government SEISS.
A Natwest spokesperson said: “As it stands, we are not accepting applications from customers who applied for a SEISS grant on or after July 14, 2020.”
Lenders such as HSBC, Metro and TSB need proof that one’s company has recovered from the pandemic.
A Metro spokesperson said: “A review of bank statements from the past six months is underway to determine current levels of trade and continued sustainability.”
A spokesperson for HSBC added: “We are asking for January, February or March 2020 business bank statements and the last 60 days of business bank statements that must be within one week of the application date. .’
In some cases, lenders demand higher deposits or equity from the self-employed.
For example, Nationwide requires a minimum deposit or equity of 15 percent from self-employed, while a Santander mortgage requires a self-employed person to cough up a minimum of 25 percent to qualify.
Some lenders require self-employed workers to have larger deposits than salaried employees to get a mortgage
Metro Bank says it will consider those who have used the SEISS, but will demand a 20 percent down payment from those who have used it.
A Metro Bank spokesperson said: “All self-employed customers who have taken out the SEISS grant are limited to a maximum loan-to-value of 80 percent and will therefore require a minimum deposit of 20 percent.”
The maximum that a self-employed person may borrow compared to a wage earner is also limited by some lenders.
For example, TSB’s maximum income multiple for the self-employed is 4.25x income, while income multiples for ‘non-self-employed people’ with total incomes over £40,000 can benefit from an income multiple of 4.75x.
Self-employed workers are also faced with longer waiting times and stricter controls, given the past 16 months.
A spokesperson for Barclays Bank said: ‘Mortgage applications from self-employed applicants are manually reviewed by insurers. This process can take longer than applications from regular clients.’
A Nationwide spokesperson added: “As a result, the impact of Covid-19 means that taking out mortgages for self-employed borrowers is much more complex than before due to the difficulties of fully assessing long-term affordability in this uncertain time.” .
As such, it may take a little 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 years’ numbers in our affordability rating.”
While this could spell the demise for those whose businesses struggled during the pandemic, there’s less reason to worry for businesses that have since recovered.
Chris Sykes, a mortgage adviser at Private Finance said: ‘Some lenders still have restrictions on self-employment, from offering lower loans to values to changing their self-employment affordability calculations across the board.
In general, for a self-employed person, if your business has reopened and you can show 3-6 months’ bank statements showing that you are back to pre-coronavirus business levels, and that you have good justification for any subsidies or subsidies. loans you have during the pandemic, then there are options for you.’
Why are lenders so strict?
Banks and construction companies will argue that the stricter measures are all part of responsible lending in uncertain times.
“It’s somewhat understandable,” Sykes said, “the world has changed, and lenders don’t want to offer self-employed mortgages only to find out 24 months later that those companies were really struggling and unable to perform on the covid levels as a result of the changing environment for businesses.”
“If they did this, I’m sure the FCA or PRA would have something to say about irresponsible lending.”
However, the self-employed may argue that ‘responsible’ lending should subject salaried employees to the same restrictions and controls.
Where can the self-employed go?
According to the Saffron Building Society, some building societies have provided assistance to the self-employed, contractors and on leave.
Saffron, claim that, along with many other associations, it has improved the number of people that assess and insure so that each applicant has a chance to tell their individual story and advocate for their acceptance.
John Penberthy-Smith, chief commercial officer at Saffron Building Society said: “While it is true that many major banks and larger lenders have tightened their application process for self-employed applicants, not all lenders have.
“By working closely with brokers, we have accepted many self-employed as our team of underwriting and intermediaries work closely during the application to get as much detail as possible about their individual situation.”
However, the advice is to talk to a mortgage broker first rather than going directly to a lender, even if they claim to be a self-employed specialist.
“My advice is to talk to a broker as they will be able to go through your full circumstances with you and assess what’s available now or if you wait a few months,” Sykes said.
“I wouldn’t recommend going directly to specialty lenders and regional building societies as you may end up paying much higher rates in the long run that will cost you tens of thousands.”
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