Clear discrepancy in approval rates
“I have seen a huge shift in criteria and access to mortgages for self-employed business owners, especially on the residential side, with increasing consideration for business continuity and stability,”
Those were the words of Gary Das (pictured), managing director of Active Financial, who explained that having specialised in self-employed mortgages since 2016, he has seen a continued push towards accessibility.
Das looked closer at the approval rates between self-employed workers and employed workers and said there is a clear discrepancy.
Read more: Self-employed mortgages under the spotlight – time for brokers to step up
“Self-employed mortgages are more complex due to the varying pieces of the puzzle - for example, being a sole trader, limited company, number of years trading, income sources, net-profits, salary, dividends, retained profits, employing family members, and BBL repayment, to name just a few,” he said.
How to help self-employed borrowers
Das believes that with many lenders increasingly flexible towards income and deposit, the key to helping the self-employed is painting a picture the lender can understand and providing a logical explanation for the business performance in the past, present and also the future.
He added that a lender’s appetite is based on risk, and with an employed person providing three payslips and three bank statements the risk is pretty clear cut, black or white.
“With a self-employed person, the paperwork a lender asks for does not always paint the full picture and accounts are three to nine months out of date,” Das said.
As such, Das explained that, in many instances, providing additional information such as management accounts, accountants’ reference for business performance and how it generates a consistent income, copies of contracts won or invoices due, and placing the application with the right lender, all helps increase the chance of the application being approved.
How advice can improve
For many advisers, Das said not enough work is being completed with the client and/or accountant to explain the business.
The lack of adviser knowledge in this area, according to Das, means applications are being placed with lenders that are not the most suitable to the self-employed and therefore the percentage of declines is increased. As a specialist niche, more attention to detail is needed.
Read more: Self-employed facing mortgage access gap
“In the same light, the client going directly to the wrong lender is like placing a square peg in a round hole,” he said. “This situation, along with listening ‘to a mate down the pub’ or negative clickbait headlines is giving the self-employed a lack of confidence when it comes to obtaining a mortgage or remortgage for their home.
“For an adviser not charging a fee, or not a high enough fee for the time involved, the groundwork might not be completed vigorously, resulting in a negative outcome for the client.”
There are around 4.2 million self-employed people in the UK, and it is typical for that number to grow when coming out of a recession, or in this case a pandemic. As such, given the current economic state of the country, self-employed applications are expected to continue to rise over the course of 2022 and into next year.
With the cost-of-living crisis impacting affordability, Das explained that it is more important for self-employed customers to take advice earlier and plan six- to 12 months ahead if they want to increase their chance of mortgage success.
“Knowing the financial goals and having a plan will increase the percentage of self-employed clients being accepted,” he concluded.
