How lenders can better support self-employed workers
With flexible working becoming the norm, self-employment can be a dream for many. In fact, according to Statista, 4.3 million people in the UK have opted for a self-employed lifestyle.
However, being your own boss comes with its own set of unique challenges, especially when it comes to borrowing money. This is where lenders can make a huge difference through greater flexibility and more bespoke affordability assessments.
How flexible self-employed assessments can help
We’re now fully engrossed in the ‘new normal’ and with this comes new ways of working and higher-income-to-house-price ratios. Mortgage solutions need to better reflect the times to ensure homeownership is both attainable and sustainable.
Here at Furness for Intermediaries, we’re firm believers in flexible mortgage assessments. Our flexible approach means that each application is assessed on an individual basis, no matter how complex your client’s income may be. We don’t use the ‘checkbox’ approach often used by lenders to make a computer-based decision. As such, we’re often able to lend to clients that other lenders cannot.
Our self-employed assessment process considers the following:
- Share of pre-tax profits when assessing affordability
- All acceptable streams of income when making a decision
- The capacity to earn additional incomes
- Director’s salary for limited company directors.
The Furness approach to self-employed mortgages
By taking a common-sense approach to underwriting, we’re able to see the bigger picture. Real people rather than AI assess every application so they’re much more carefully considered. This means that if you don’t meet the ‘checkbox’ criteria, you’re not automatically ruled out for a mortgage.
For example, we look at profit before tax as part of our affordability assessments, usually using two years’ accounts. However, if your client has a particularly good track record, we will consider one or one and a half years’ accounts instead, although an LTV restriction may apply.
Other lenders will also typically look at salary and dividends. This can impact those who have chosen to retain profit in the business for tax or capital reserve purposes. At Furness, we look at salary and share of pre-tax profit, which typically provides a customer with higher borrowing capacity.
We’ve outlined some of these scenarios below, demonstrating how we help our brokers overcome some of the affordability issues that may be presented after a very unpredictable and highly unusual couple of years.
Please note that the following scenarios are for illustrative purposes only.
Scenario 1
Who:
A barrister who has only recently qualified.
The Challenge:
Most lenders will only work from the previous year’s earnings but, as the applicant has only recently qualified, their affordability didn’t match. The assessed net profit only reflected the applicant's earnings in the first year after completing pupillage. Future earnings are projected to substantially escalate, as the applicant builds a client base - with subsequent year-on-year profit increases expected.
The Solution:
We understand that earnings would be lower in the first year after being called to the bar. We also appreciate the expected income escalation that barristers typically experience in subsequent years. In this case, we would accept a Chambers Letter of projected earnings, backed up with an accountant's confirmations.
In this instance, we weren’t too far away from the latest accounts being finalised anyway, but this approach enabled the client to purchase the property now.
Scenario 2
Who:
A freelance designer who experienced a decrease in net income, but hopes to remortgage to a fixed-rate product. They had, however, managed to navigate through to better times without taking on any additional debt
The Challenge:
A decrease in work opportunities during the previous year means this client’s income would be significantly lower than when they first took out their mortgage.
The Solution:
The key consideration for a case like this would be if the client can prove that they’ve experienced strong performance in previous years. If the client is able to provide management accounts to demonstrate profit returning to previous levels, then we would be able to consider the case.
Scenario 3
Who:
An established photographer who, unable to secure bookings during the first year of the pandemic, had taken on work at their local supermarket as an employee. Once things opened up - he was able to get back to working as a photographer and has just had a full year's trading accounts finalised.
The Challenge:
Despite having evidence of profit from a full year's return to trading, he was concerned about what view lenders would take over the temporary change to employment and fluctuation of income. Not all lenders understood the circumstances around his variable income during 2020.
The Solution:
If profit was consistent pre-pandemic and the applicant was able to fulfil all financial commitments during an understandably turbulent period, we would be willing to try and assist. Our approach allows us to take a balanced view on an established business, which could now evidence a return to pre-pandemic profit levels.
After obtaining supporting documentation to confirm current and previous profit levels, backed up with an accountant’s supporting comments, we were able to move forward.
Find a solution for your self-employed client
If you have a case you think we could help you with, please get in touch with your local BDM. You can also use our online mortgage finder to review the deals currently available to our intermediary partners.
Don’t forget, if you’re already registered with us you can apply for mortgages online.
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