With the self-employed hit in last week’s Budget as expected, the second charge sector can come into its own
The hike in National Insurance contributions of the self-employed in the Budget last week attracted widespread criticism and prompted fears of damage to the country’s ‘entrepreneurial spirit’.
There is certainly a strong entrepreneurial trend in the UK. According to figures from Aldermore, 15 per cent of the country’s working population aims to be self-employed at some point, with 12 per cent planning the leap within the next six months.
Despite these figures, however, this market is under-serviced when it comes to financial services.
There have long been calls for mainstream lenders to take a more flexible approach to self-employed and contract workers, and we are starting to see improvements. Earlier this year, Aldermore reduced the minimum accounts a self-employed borrower must provide from two years to one, while just this month Barclays has designed a mortgage aimed specifically at entrepreneurs.
There is certainly an argument that more first charge lenders should ensure their self-employed criteria reflect society. But it can also be said that borrowers are not exploring other options – namely, second charges.
Second charges are available for prime self-employed borrowers who have been trading for only six months, with lenders willing to consider management accounts plus projections from borrowers’ accountants.
Some lenders are also adding back retained profit into the affordability calculation. Indeed, just because business owners have not stripped out profits in the past, they should not be penalised if they wish to do so in the future to service their proposed debts. This is a sensible, bespoke underwriting approach rather than a blinkered rules-based attitude.
For borrowers who have been self-employed for over 12 months, many lenders accept SA302s and, contrary to popular belief, adverse credit is not a barrier to self-employed borrowing. In fact, mild adverse can be catered for at prime rates and heavy adverse is acceptable up to 75 per cent LTV.
Contract workers are also considered more favourably in the seconds sector as long as they can demonstrate a decent working history, even if they have moved contract or sector. Lenders take a bespoke approach, seeking stability and the story behind the facts.
Self-employed borrowers who resorted to debt management during the downturn and are now keen to repair their credit history can choose from a number of second charge lenders that will allow them to pay off such debt, recycling them towards the mainstream remortgage market.
Of course, this may not always be good advice, so options exist to keep the repayment plan in place provided it is adhered to. Even individual voluntary arrangements and bankruptcies can be cleared from the proceeds of a loan where it is suitable and affordable.
Those who trade through a limited company can take out business loans secured on their homes. These have proved useful for borrowers declined by the high street due to income or adverse credit. We have seen scenarios where lenders have taken third charges, allowing borrowers to retain their competitive first and second charges and borrow less at the higher business interest rates. Similarly, such lenders take a more flexible view regarding trading accounts and start-up businesses.
In buy-to-let, raising capital for deposits or refurbishments has got tougher. The second charge sector has reacted in various ways, with some prime lenders cutting rates, offering five-year fixes to reduce the impact of stress testing and allowing additional earned income to be used to support shortfalls in rental coverage.
All in all, second charge lenders’ appetite for manual underwriting, together with the expertise of specialist master brokers unafraid to present a case where common sense should prevail, means the sector provides a natural solution for many self-employed scenarios.
Steve Walker is managing director of Promise Specialist Solutions