Self-employed borrowers have more options than ever but brokers need to know which lenders are most sympathetic
The self-employed sector has undergone a transformation in recent years. Not only are there 4.8 million self-employed people compared to 3.8 million in 2008 but today self-employment is preferred by many of those beginning their career.
The self-employed represent 15 per cent of the total UK workforce and 60 per cent of the sector’s growth over the past five years has come from higher-skilled managerial, professional and associate professional jobs. All of which is great news.
Historically, however, the self-employed have often struggled to obtain a mortgage, especially if the applicant had fewer than three years’ trading records.
But there have been significant changes in recent years. At today’s count, for example, at least 11 specialist lenders accept applications from the self-employed with just one year’s accounts, and lenders such as Saffron Building Society now accept applications up to 90 per cent LTV. The self-employed should no longer feel marginalised.
Dealing with their applications, however, can still be challenging for brokers, especially in understanding the different ways in which lenders assess income.
From a lender’s perspective, the self-employed are considered to be either sole traders or owners of a limited company with at least a 20 per cent shareholding.
Many mainstream lenders accept two years’ trading accounts and, in the case of a limited company, tend to focus on just directors’ remuneration and dividends when assessing income (using an SA302), which can penalise some self-employed applicants.
Many ignore factors such as profit retained in the business, pension contributions, car allowances and use of the home as an office, and the lender may work with an average of the past two or three years’ figures, rather than the most recent results.
A number of specialist lenders, on the other hand, accept just one year’s accounts and may instead focus on the net profit retained in a business as well as directors’ remuneration.
There is also a lender that focuses on operating profit (gross profit minus operating expenses and before the deduction of tax), which is arguably more akin to the way employees are assessed using gross salary. This can make a big difference.
Consider the following example, which shows that, whereas a mainstream lender may consider the applicant’s income to be £100,000, a specialist lender (in this case, The Mortgage Lender) would regard the same person as having an income of £665,000, subject to a full assessment. That’s a big difference!
The applicant is a 100 per cent shareholder of a limited company and his accounts show profit before tax of £495,000, net retained profit of £395,000, dividend payments of £100,000 and a lump sum pension contribution of £170,000.
In this instance, TML was willing to work with an operating profit of £495,000 and also take into consideration the pension payment of £170,000. A mainstream lender, on the other hand, may work off just the £100,000 dividend as it may see that as the only source of personal income.
Brokers therefore need to understand which lenders are most sympathetic to self-employed borrowers and, if in doubt, seek the input of a specialist distributor to highlight the differences between lenders.
The good news is that the self-employed have far more mortgage options than ever.
Specialist lenders have continued to enhance their product ranges in recent weeks:
- Precise Mortgages has refreshed its entire BTL range with rates starting from 3.19 per cent. The products include new packager exclusives for landlords with less than perfect credit profiles.
- Kent Reliance has reintroduced its lowest-priced 75 per cent LTV five-year fixed rates for BTL standard and BTL specialist deals.
- Saffron for Intermediaries has increased its LTV to 90 per cent for self-employed borrowers with just one year’s accounts. This is also available for first-time buyers.
- Magellan Homeloans has made various criteria improvements, including allowing one year’s self-employed trading accounts to be considered on M1 products.
- Foundation Homeloans has new BTL products such as the return of the Elite Partners range, including a five-year fixed exclusive at 3.45 per cent with rental from 125 per cent at the pay rate.
- Bluestone Mortgages’ various improvements include raising its maximum LTV to 85 per cent and offering criteria for previously bankrupt clients.
- Paragon Mortgages has improved products for its Premier range, which is available to 80 per cent LTV and via selected packagers.
- Vida Homeloans has a Limited Edition range for both residential and BTL clients, launching its lowest-ever rates.
- Finally, Kensington Mortgages has introduced a ‘select’ series of products. These include a 90 per cent LTV specialist distributor range that is available only via selected firms.
Doug Hall is a director at 3mc