Many landlords have found themselves at the end of the pandemic’s thunderous domino run of financial ruin, where tenants have suffered a dramatic drop in income and cannot afford to pay their rent. While buy-to-let landlords are able to take a mortgage payment holiday, it won’t help them to recover lost income.
From personal trainers to YouTube sensations, the working world is vast in its variety and entrepreneurial spirit. Yet the mortgage sector has not always demonstrated the same innovative spirit when catering for complex borrowers.
There has long been a perception that the self-employed and those with non-standard incomes struggle more than most when trying to secure a mortgage, and the pandemic has heightened this. However, with around five million self-employed workers in the UK, this is a demographic in need of both mortgage advice and solutions.
How is the market providing for such borrowers, and could we see more lenders make a push into this space?
Changing working habits
Whether through financial necessity or the desire for a new challenge, the pandemic has led to a career rethink for many. According to Aviva’s ‘How We Live’ report, more than half of UK workers — 53% — plan to change their career in the wake of coronavirus. The survey found that 6% — the equivalent of 2.1 million workers — were looking to either set up their own business or work for themselves. Another report, ‘Start-up Appetite’ from Enterprise Nation and Start Up Loans, found one in five adults wanted to start their own business in 2021.
“It stands to reason that, in light of the pandemic, some people have decided to go down the self-employed route; which could be an enforced move, or working remotely has encouraged them to consider a lifestyle change,” says London & Country associate director of communications David Hollingworth.
When it comes to securing a mortgage, however, the more complex a borrower’s income, the harder it seems to be. Recent data from Mortgage Broker Tools’ Affordability Index found that, of all the self-employed cases processed through its research platform in February 2021, 67% had at least one affordability option — down from 71% in January. Meanwhile, 31% of cases were deemed unaffordable based on the client’s required loan amount, with lenders unable to lend on 2% of cases.
In contrast, across the whole of the market, 79% of cases were affordable in February — down from 80% in January.
Brightstar Financial head of sales Gina Blagden says borrowing is clearly more difficult for the self-employed at the moment.
“It’s a tougher market than it has been,” she says. “Some lenders are taking a negative approach to self-employed people who have accessed government support schemes, even though for many this was just a precaution. However, there are options, and there are lenders able to take a pragmatic view on a client’s future ability to sustain their repayments.”
Desire to lend
Before Covid, the desire to lend to self-employed and other complex clients existed among both mainstream and specialist lenders. Arguably, it still does, yet the pandemic has created barriers that are proving tricky for some lenders to overcome.
The unpredictability of lockdowns, and the subsequent impact on various sectors such as the arts, hospitality and small businesses, has been problematic when judging many borrowers’ income.
“Self-employed borrowers are well catered for if the lenders will actually lend to them,” says JLM Mortgage Services head of mortgage finance Sebastian Murphy.
“The problems at present involve exhaustive checks on these borrowers followed by inconsistent underwriting, and this has severely hampered the ability of self-employed borrowers to secure finance over the past year.
“Now we are within the 2021/22 tax year, we hope it will become much easier to secure mortgages for the self-employed because lenders will have much more information on their finances.”
Indeed, last year’s tax accounts are proving to be a sticking point for many lenders. Santander recently became one of the first mainstream lenders to announce its stance towards self-employed borrowers who had been adversely affected by Covid. It will discard their 2020/21 accounts and instead base its income assessment on their 2018/19 and 2019/20 accounting periods. However, it will deduct any future Covid-related liabilities from the borrower’s net profit, such as deferred tax liabilities and bounceback loans.
“This move from a big lender such as Santander demonstrates that the issue is going to be with us for some time,” says Hollingworth. “A lot of people will have seen a radical change to their income as a result of Covid. If their business then bounces back, is it really fair to say their 2020/21 accounts will impact heavily on their ability to get a mortgage?
“What doesn’t go away is the need for the borrower to demonstrate affordability and verify their income, which is what lenders like Santander will still be looking for,” he adds.
As shown by Santander’s move, some mainstream lenders are willing to cater for borrowers with complex needs.
“There are no mainstream lenders I can think of who say they don’t lend to the self-employed,” says Hollingworth.
“The issues and complications arise in how they assess their income. The larger lenders are doing much more individual underwriting and looking at business bank statements, for example, to ascertain a more real-time picture of a borrower’s finances. In the past they might have just looked at their last two years’ accounts.”
Hollingworth believes the market is still at an early stage when it comes to lenders deciding how to assess affordability. But the sheer size of many mainstream lenders makes it unlikely they will want to undertake a manual approach for every self-employed client.
Specialist dominance
Blagden expects the specialist sector to remain the go-to place for self-employed applicants for the time being, given that most other banks have ruled out emulating Santander.
“There is certainly an increase in the number of self-employed workers who are struggling to secure the mortgage they need from mainstream lenders,” she says, “because many lenders have become more restrictive in their criteria, limiting affordability calculations and LTVs.
“However, the specialist market has remained open for the self-employed and we are placing with them a higher number of cases that might previously have gone to the high street.”
Kent Reliance for Intermediaries (KRFI) group sales director Adrian Moloney does not anticipate mainstream lenders moving more into the complex market in the immediate future.
“By default with the furlough scheme, high-street lenders are having to adapt their underwriting to deal with more complex income streams, which they won’t be used to,” he says. “It probably means they are having to use greater resource for the same results. In addition, most high-street lenders are involved with the new 95% government-backed lending scheme, so they have more than enough on their plates for the time being.”
Moloney emphasises the importance of a manual approach for self-employed borrowers.
“For KRFI, the main consideration has always been sustainability of affordability because that’s a key area of risk. Although we will look at the impact of Covid, we will also assess the uptake and uses of the various government income support/emergency loan schemes.
“Some applicants are taking these to support their income; others are taking them as a safety blanket to mitigate against future negative impacts. But we’ve also seen clients replace expensive business overdraft facilities with the support loans. We’re even seeing some applicants trying to use emergency loan support as a deposit for mortgage transactions, which of course is not acceptable because it’s not in the spirit of the scheme,” he says.
If the larger mainstream lenders do not adopt a manual approach or a prescribed tactic such as Santander’s, it is hard to see how they can serve the self-employed en masse.
“I think the specialists will see it as an opportunity,” says Hollingworth, but he adds that the issue will be “too big” for mainstream lenders to ignore.
At the moment it’s a case of wait and see, but hopefully whatever action the market decides to take will widen the options for self-employed and other non-standard workers.
Covid has made it harder for the self-employed and contract workers
Chris Kenny, mortgage and protection adviser, Haysto
Self-employed and contract workers have generally suffered more than others during the pandemic in terms of their employment, especially those who work in the entertainment industry.
For example, a friend for whom I’ve done several mortgages works in the TV industry. Last time we worked together, he had three big contracts lined up over the next two years. When I spoke to him a couple of weeks ago, all these contracts had gone because the productions had lost their funding. Similarly, another client I spoke with just before the first lockdown is a consultant in the events industry and sadly hasn’t worked for a year.
Previously, self-employed people could supply a couple of years’ tax calculations or accounts and maybe an accountant’s projection and you’d be good to go. Nowadays, lenders closely scrutinise bank statements to ensure that the turnover going through them matches what the tax calculations or accounts show. One particular high-street lender at the moment doesn’t even bother looking at the tax documents and works solely from the bank statements.
With contractors, depending on the length remaining on the contract, you’d normally be asked for evidence of a previous one to show track record and perhaps evidence that the current one is due to be renewed, or a new one is lined up. If you’re contracting in an industry that’s been impacted even slightly by Covid, lenders are typically asking for a much greater track record and much more solid evidence that there’s still work to be had when the current contract ends.
When it comes to self-employed borrowers, they are pretty well catered for by the high street as well as the specialists. There are a few lenders that do things like look at net, or even retained profit from accounts, and consider latest years’ accounts only rather than an average. Many lenders treat contractors as self-employed but some work from the figures of the contract and treat them as employed applicants, which in my opinion is a far better assessment of their income.
We are also seeing those who have been positively impacted by Covid. For instance, delivery drivers are earning more money than ever. In these scenarios, lenders can be reluctant to lend based on their current earnings because they’re so much higher and could be seen as artificially inflated by the pandemic. The question is: when the world gets back to normal, will that income drop again?
