Overall trends indicate shift towards more inclusive lending practices, but challenges remain
This article was provided by Precise
Mortgage trends for self-employed individuals have evolved significantly in recent years, reflecting broader changes in the labour market and lending practices. As the gig economy expands and more people embrace entrepreneurship, lenders and brokers alike are adapting their approaches to serve this growing segment of borrowers.
With nearly 4.32 million people now working for themselves, the figures are making their way back to levels last seen pre-pandemic(1). However, despite the rising numbers of self-employed workers, their complicated incomes mean many of them still struggle to get a residential mortgage with a high street lender. In fact, 30% of self-employed individuals recently surveyed by The Mortgage Lender said they’ve never applied for a mortgage because they didn’t think they would be approved(2).
Adding insult to injury, recent economic uncertainties, including those stemming from the COVID-19 crisis, have led to some tightening of lending standards for self-employed borrowers. Many lenders are scrutinising recent business performance more closely and a significant number now require additional documentation to prove ongoing business viability.
According to Mortgage Brokers Tool’s latest Affordability Index, many self-employed are struggling to get a mortgage as lenders are increasingly quizzing them about the impact inflation, the energy crisis, the pandemic and Brexit has had on their business. As a result, around 65% of self-employed applications were considered affordable at the end of 2022, the lowest level since the company began tracking numbers back in 2020(3).
Fortunately, as one of the UK’s leading specialist lenders, Precise is on the side of self-employed workers and the brokers who support them. We know the challenges you face and are committed to keeping things as simple as possible.
What that means in practice is that we don’t put extra strain on your self-employed customers, even if they have an adverse income or imperfect credit file. Whether they’re new to the growing ranks of those working for themselves or heading up a long-established business, our range of residential mortgages is designed to support them and you. We’ll consider:
Trading or financial year-end and can work on the latest year or an average, whichever is higher
Instead of relying solely on tax returns, which may not accurately reflect a self-employed person's true income due to business deductions, we now accept alternative forms of income verification. This approach allows you to present a more comprehensive picture of your customer’s financial situation.
Changes in trading style during the last 12 months
As more people engage in multiple jobs or combine self-employment with part-time traditional employment, we’ve becoming adept at evaluating diverse and dynamic income sources.
Adverse credit, including defaults, CCJs, secured and unsecured arrears, as well as active and satisfied DMPs
Who doesn’t have a missed payment on their file these days? We look past blips in credit history and instead take a holistic view of an individual’s financial health.
100% pension contributions as part of total annual income
Pension pots can significantly boost the total annual income on mortgage applications, potentially increasing your customer’s borrowing capacity. After all, regular contributions demonstrate financial responsibility and long-term planning.
Limited companies, sole traders and partnerships
Traditional lending models struggle to accurately capture the financial health of these business types, especially as their structures typically have fluctuating incomes, which some lenders perceive as riskier. Strategies to minimise tax liability can also result in lower reported incomes, potentially reducing borrowing capacity. We get it – and we’ve factored in these idiosyncrasies to secure the best possible outcome for your customer.
Cut the confusion with cascade
Convoluted lending standards have a detrimental impact on both buyers and brokers, with 86% of brokers surveyed by Mortgage Broker Tools agreeing that mortgage affordability is more complex than ever (4). Our approach is comprehensive, but it’s definitely not complicated. The Precise cascade system automatically filters cases through our tiers until an appropriate product is found for your customer, without the need to reapply.
And while we can’t guarantee that we’ll always be able to place a case, we can give you the best chance to find the lending solution your customer needs.
To give you an idea of the sort of cases that could benefit from our cascade system, here’s a list of the maximum adverse we accept:
- Defaults – five in 24 months.
- CCJs – three in 24 months.
- Debt Management Plans (DMPs) – Accepted if satisfied more than 36 months ago.
- Missed mortgage/secured loan arrears – three in 36 months (worst status).
- Unsecured arrears – Not counted, but may affect customer’s credit score.
Just DIP It
Overall trends indicate a gradual shift towards more inclusive lending practices for self-employed individuals, but it’s clear that challenges remain. We’re committed to giving you quick decisions that are clear and to the point, as well as making sure you’ve got the tools you need to help as many of your customers as possible.
A DIP with Precise means:
- No need to reapply
- Instant decision, so no waiting around
- A soft footprint that won’t affect your customer’s credit score
And don’t forget, if you ever need a little extra help, you can access dedicated support from our expert teams who are on hand with top-notch advice from submission to completion.
