The coronavirus crisis has seen numerous lenders make changes to lending criteria across the board. Many have reduced the loan-to-value ratios available to all borrowers, while others have changed how they assess overtime and commission income or introduced new criteria regarding furloughed workers.
Criteria is changing so rapidly that Knowledge Bank reported that it had almost 500 changes to criteria from 14 different lenders in just 48 hours at one point.
Some of the biggest changes affect how lenders treat self-employed borrowers and applicants on zero-hours contracts.
It’s easy to see why lenders are nervy – the UK’s self-employed workforce has undoubtedly been one of the major casualties of the pandemic so far. Calculations by fintech Portify point to a 30 per cent decline in the average income of self-employed and gig economy workers in the first two weeks of April alone.
While most small businesses and self-employed workers can claim support from the government, there are a number of business set-ups that fall through the gaps and, as it stands at the moment, will receive little or no support.
Proving income
Metro Bank now requires self-employed applicants to demonstrate the “sustainability and profit” of the business.
Private Finance mortgage consultant Chris Sykes says: “While it is not explicit what this entails, given the widespread publicity of the difficulties faced by those who are self-employed during the current coronavirus and the long-term economic damage, we assume these applicants will be subject to more rigorous assessments.
“Ultimately, no lender wants a customer to proceed with a mortgage that is potentially unaffordable (from an ethical and a risk perspective). Other major lenders will follow suit – the only question is when.”
One lender that appears to have taken a particularly hard-line on self-employed applications is West Brom for Intermediaries. It says it will not accept applicants from self-employed borrowers receiving money from the government’s self-employed income support scheme.
The government scheme allows most self-employed workers to claim a taxable grant worth 80 per cent of their trading profits up to a maximum of £2,500 a month, initially for three months (although the scheme may be extended). The money is expected to be paid in June and self-employed workers can continue to work, despite claiming the grant.
Grange Mortgages managing director Daniel Mumford suggests West Brom has taken this approach to reduce its distribution model. “I believe they have taken the action to focus on supporting the main stay of their customers who are local to them, rather than provide a national proposition which they could simply not support,” he says, “Historically many of the smaller building societies have only lent in geographical areas surrounding their homelands, so this appears to be a returning to their roots somewhat.”
Virgin Money has taken a similar stance. Where a self-employed customer has applied for the self-employed income support scheme, their income will not be used in Virgin’s affordability assessment. All self-employed borrowers will need to provide their last three months’ business bank statements to evidence continued turnover.
HSBC is another lender which now requires sole traders and partnerships to provide the latest three months’ worth of business bank statements.
SPF Private Clients chief executive Mark Harris says: “It is understandable if lenders are asking applicants to confirm whether there has been a material change to their status/income and so on. For self-employed applications, that may mean sight of up-to-date bank statements, contracts and invoices.
“A few lenders have taken a step back from lending to the self-employed but others are still happy to lend – they might just ask a few more questions before they do so.”
Open for business
Lenders which are still happy to lend to self-employed borrowers include Yorkshire Building Society and its intermediary-arm Accord Mortgages. Neither has changed its lending criteria or affordability assessments for self-employed borrowers with applications continuing to be assessed on a case-by-case basis.
Kensington Mortgages is another lender keen to adopt a business-as-usual approach.
Kensington Mortgages new business director Craig McKinlay says: “We have not made any changes to our self-employed criteria, although we will, as always, be making sure that what we can offer this group is sustainable for them now and their future. We will continue to monitor the current environment and are in close contact with UK Finance to keep up to date with official guidance and industry best practice in these exceptional times.”
Aldermore says it hasn’t changed the way it looks at affordability but it has made some “minor adjustments” to its lending criteria. For example, the bank now wants to see a minimum of two years’ accounts from self-employed applicants, rather than one.
Aldermore head of mortgage distribution Jon Cooper says: “In addition because of the current environment, our underwriters are asking customers to provide more information in relation to their current income and their business, for example how it may have been affected by Covid-19 so we can understand more about their financial situation and their business circumstances at this current time.”
London and Country associate director David Hollingworth says the pandemic is likely to bring several challenges to the self-employed workforce. These include the effect on their business and therefore their income, as well as their mortgage options.
He says: “Most lenders are still offering products of some kind and will of course still be able to help the self-employed. However, the specialist sector which is so often a viable option for those with more limited track record is an area that has perhaps suffered to a greater degree than the mainstream lenders.
“With lenders such as Vida, Precise and Together not currently offering products for new business there will be an impact on choice. However, there are still specialist lenders such as Kensington and Aldermore that are still offering products.
“This is a difficult line for lenders to tread where borrowers can be really assisted by getting the best rates on offer but making sure that their borrowing will remain affordable.”
Zero-hours contracts
The coronavirus has also seen several lenders change their stance on applications from workers on zero-hours contracts.
At HSBC, zero-hours income will need to be part of a joint application and will be limited to certain professions. Accepted professions are: NHS bank nurses and locums; non-NHS bank nurses; care home workers; supermarket workers (including delivery drivers).
It was only in September last year that HSBC relaxed its approach to zero-hours workers by reducing the amount of continuous employment required with the same employer from two years to one year. Borrowers also only needed to show one payslip rather than three, as was the case previously.
Nationwide has taken a similar approach to zero-hours workers during the pandemic. The building society will now only accept zero-hours contract income from similar professions as those listed by HSBC, plus retained or on-call firefighters and armed forces reservists.
In addition, a single applicant on a zero-hours contract must have another source of income, while joint applications must be with someone with employed or self-employed earnings.
Coventry for Intermediaries has a similar list of professions from which it will accept income from zero-hour workers.
Whatever borrowers’ employment status, it’s understandable that lenders have had to re-think their lending criteria during the pandemic. In the long-term, brokers and customers alike can expect to see the mortgage industry adopt a “new normal” as it has done following previous economic downturns.
