External factors worsening affordability for the group.
Self-employed borrowers have always had to jump over extra hurdles in order to get a mortgage product, however this has only become more difficult given the current state of the financial market.
The cost-of-living and energy bills crisis have both impacted affordability, combined with the pandemic, rising inflation, base rate increases and the war in Ukraine – with the latter having affected fuel prices.
As such, people are paying more for the same, with wages not having increased in line with rising inflation, this has resulted in affordability for the self-employed having declined significantly.
“Self-employed borrowers have always found it disproportionately hard to get a mortgage compared to their counterparts with more traditional income streams,” according to Matt Harrison (pictured), sales director at finova.
For example, he explained that in most cases, a self-employed applicant needs to show two or more years of company trading accounts as evidence of income, while an employed applicant may need just three months of payslips.
“This has only gotten harder following the COVID-19 pandemic. The way the pandemic impacted the economy has made it especially hard for people who are self-employed to borrow money,” Harrison said.
Early on during the pandemic, many mortgage lenders began to withdraw from the specialist market, or made significant changes to their self-employed criteria. This made it increasingly difficult for self-employed borrowers to access products and left them stranded, unable to buy unless they accepted much higher rates.
Harrison explained that government support for self-employed workers was not as clear cut as the furlough scheme, and many who accessed the Self-Employment Income Support Scheme (SEISS) grant are now finding that this has impacted the amount they can borrow, or which lenders they can use. The last date for making a claim was also September 30, 2021 – meaning the after-effects of the pandemic are still being felt by the self-employed, without a scheme currently in place to help support them.
According to the Office for National Statistics, there are 4.8 million self-employed people in the UK, which makes up 15.1% of the workforce, a stark increase from 3.3 million in 2001.
With the number of self-employed on the rise, finding solutions for their house buying needs is only becoming more and more important, Harrison outlined.
“As well as more complex income requirements, a lack of education on situations specific to the self-employed can make it harder for these borrowers to secure a mortgage. Take incorporation relief, for example,” Harrison said.
He explained that to be eligible for incorporation relief an individual must be a sole trader or in a business partnership and transfer the business and all its assets, except cash, in return for shares in the company. In order to work out the amount one must pay Capital Gains Tax on, you must deduct the gain made when selling a business from the market value of the shares received.
“There are many ways self-employed people release income in tax efficient ways, which means that communicating the company outgoings to the underwriter can be increasingly complex, especially when there may be spousal company shareholdings, umbrella companies or director loans,” Harrison said.
According to Harrison, these complex requirements are then compounded by the other typical peculiarities that come up in a mortgage application.
“To deliver the best service, brokers need to put in additional time and care researching, packaging and presenting a self-employed borrower’s mortgage application to make sure the lender does not need further information, therefore increasing timescales in what can already be a lengthy process,” Harrison concluded.