How difficult is it to arrange mortgages for the self-employed?

There are over four million self-employed individuals in the UK, according to the Office for National Statistics (ONS). Amid a challenging economy in which to run a business, those self-employed individuals looking to take out a mortgage can often feel like they are facing an uphill battle.

However, while many may assume serving the self-employed is troublesome, brokers have presented conflicting views on the challenges and difficulty of catering to these borrowers’ needs.

Serving the self-employed – the challenges

Seen as higher risk than employed individuals for a lot of lenders, Kim Balasubramaniam (pictured), senior mortgage broker at The Mortgage Mum, said self-employed clients can often find themselves with lower income multiples for affordability, lower loan-to-value (LTV) thresholds and higher rates.

“There is also often the dichotomy between being tax efficient and being able to prove enough income,” she said.

Balasubramaniam added that self-employed individuals often take advantage of various deductions to reduce their taxable income, but when looking to get a mortgage, this can be detrimental to affordability.

While some lenders will look beyond the salary taken, others do not, so she said it is vital to understand the structure of the business before submitting an application.

“Additionally, if they are looking to get a mortgage mid business financial year, they may find that although the current year’s figures are looking sound, they are still having to take into account 2021 figures which may be impacted by COVID,” Balasubramaniam said.

Although the number of businesses this affects will reduce as time goes on, Balasubramaniam said it is still something she is witnessing.

Finally, she said many self-employed borrowers have either recently started their businesses, or have income from various sources, which can be more complicated to evidence.

Dominik Lipnicki, director of Your Mortgage Decisions, concurred with Balasubramaniam and added that, without a doubt, providing mortgages for self-employed clients can be complicated.

“It is often confusing criteria from lenders, and clients being unprepared to move forward, that can make a mortgage adviser’s life more challenging,” he added.

When first contacting advisers, he said clients are often guessing as to their earnings and what can and cannot be used for borrowing. Lipnicki added that clearly far more documentation is required for self-employed clients.

“The majority of lenders require a variety of documents for self-employed applicants to jump through; some of the documents required could be company accounts, SA302s, tax year overviews and accountants’ references,” he said.

When it comes to income, depending on how the applicant is paid, Lipnicki said lenders will look at salary, dividends, gross and/or net profit, hence he believes it can be a real minefield.

“COVID has also complicated issues for some, as lenders can look at bounce back loans, grants and levels of income during the pandemic,” Lipnicki said.

Serving the self-employed can be easy

Barry Webb, chief executive of Mortgage Saving Experts, disagreed with the sentiments around self-employed borrowers being complex, believing they present very few extra challenges.

“Since the introduction of various grants and schemes to help the self-employed, the challenges serving this area of the market have diminished,” he said.

The only issue with self-employed borrowers, Webb said, is that they will usually need to show two years of decent profit around the income level they need to borrow.

However, Webb highlighted that some lenders only require one year; and if the client is a limited company director, then the lenders can assess their income as their share of net profit from the company, minus corporation tax, plus salary.

“Different lenders usually work in different ways and there is a myth that getting a mortgage for a self-employed person is unachievable, but this is simply not the case,” he said.

Webb believes brokers need to educate the wider public, as well as clients, in order to reassure them that “getting a mortgage for the self-employed is, in fact, easy.”

Do you believe serving the self-employed is troublesome? Let us know in the comment section below.