What's happening with the self-employed?
08 September 2021
08 September 2021
My only personal perception was that the pandemic had encouraged more mortgage advisers to take the plunge into self-employment.
Whilst that may be true in our small pocket of the industry, it does not appear to be the general rule. Recent data from Statistica shows a different picture. They confirm that as of June 2021, there are approximately 4.2 million self-employed workers in the United Kingdom. Self-employment in the UK has grown steadily, from a low of just 3.2 million December 2000, to a peak of over 5.03 million at the start of 2020. In the wake of the Coronavirus (COVID-19) pandemic, however, self-employment fell to the current 4.2 million, a level not seen since the middle of 2015. https://www.statista.com/statistics/318234/united-kingdom-self-employed/
Many of the self-employed market has suffered throughout the pandemic from lack of regular income and less support from the Government. Some recent research by specialist lender TML may, however, shed further light on the reduced numbers.
In their recent poll, they found that 4 out of 10 self-employed were considering giving up that status in favour of becoming employed after a drop in earnings due to the pandemic. 3 out of 10 are concerned about their ability to secure a new mortgage, and 55% of existing mortgage holders feared they would not be able to secure a loan for the amount they currently owe if their borrowing was based on their self-employed earnings over the last year.
Are these fears founded? Recognising the size of the opportunity, lenders, particularly those in the specialist markets, are looking at ways to support this type of borrower.
For example, there are over 20 lenders who will consider applications from self-employed applicants with just one years' worth of accounts. Some of these have other conditions, such as projected future figures. Advisers can use criteria-based software to establish which lenders will lend in these circumstances. However, assessing which lenders will lend to the newly self-employed with just 1 year's accounts is more straightforward than determining how lenders will view pandemic related falling profits.
For example, Halifax recently updated their policy and confirmed for any self-employed incomes where the income keyed for the 'previous year' is up to £50,000, the income used in affordability will be the lower of the last two years' income figures. But where the income in the 'previous year' is above £50,000, the income used in affordability will remain as the lower of the latest year or the average of the last two years.
Kensington has a specific Income recovery plan for the self-employed whose income has been affected by the pandemic and have seen a dip in profits and will still take an average of the last two years provided the drop in income is not more than 25%. The Mortgage Lender standout as they are happy to use just the latest years accounts figures for affordability regardless of how long someone has been self-employed.
Another area for advisers to understand is whether their applicant is a shareholder and a limited company director. If the applicant holds more than 20-25% of the shares of a company, then even if the company employs them, the lender will treat them as self-employed. The requirements of the length of self-employment then still apply, but most lenders will take into account just the director's salary and their dividends. This requirement can cause some issues for directors who take just a modest salary and do not draw the profits from the business as dividends.
Lenders like Virgin and Aldermore, among others, do have the flexibility however to consider salary and company profits instead of salary and dividends, which can help these types of clients.
Advisers can add value to their customers by fully understanding some of these nuances of lenders criteria and offer their clients an alternative to becoming employed again just for mortgage purposes.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.