When it comes to securing mortgage finance, self-employed borrowers have always faced a number of additional hurdles compared to their employed counterparts.

But this disparity has worsened since the Covid-19 pandemic. Given the recent rise in house prices, stretching affordability calculations, ongoing economic uncertainty, and a health crisis that is yet to be resolved, brokers expect that the landscape for self-employed borrowers will remain difficult for some time to come.

The challenge, from a lending point of view, has always been to determine whether declared information on self-employed income gives a true picture and a full account of an individual’s situation — and whether this income will be supported in future.

Those furloughed were often treated far better than those that were self-employed

Virtus Private Finance director Sebastian Riemann says: “This assessment is fine as it is fairly easy to predict general trends, but throw in a curve ball the size of the Covid pandemic and you are left with some businesses struggling while others fare much better.

“The hardest part then is to predict whether this upturn or downturn is temporary or likely to continue once the dust has settled. From a lender’s perspective, an already difficult assessment is made significantly harder and the risk magnified.”

Self-employed borrowers may not generally be penalised on rate, but most will have to meet additional criteria when compared to PAYE borrowers, and will need to provide additional evidence to verify their income. Lenders have become more cautious on both fronts since Covid.

Brokers say this means the self-employed face a more drawn out application process, with many cases needing to be underwritten individually.

Many lenders are now looking to relax their criteria to allow self-employed lending to continue

The situation has been further complicated by the different levels of government support available for those whose income has been hit by the pandemic and subsequent economic lockdowns.

While there was generous government support for employed workers, via the furlough scheme, help for self-employed borrowers was slower to emerge and has, in some cases, been less generous.

Preferential treatment

Riemann says: “It has been evident that those furloughed were often treated far better than those that were self-employed who suffered a reduction in income during the same period.”

He says that the support available, via grants and specific loans, was not always looked upon favourably by many lenders.

The mainstream won’t ignore the self-employed — there’s too much business out there for this to happen

L&C Mortgages associate director David Hollingworth agrees. “The furlough scheme helped many employed borrowers keep their head above water, enabling them to demonstrate ongoing income with a good degree of certainty behind it.

“The self-employed ultimately did receive support, but they have needed to provide more evidence to be able to satisfy lenders that income was not too adversely affected by lockdown and Covid disruptions,” he says.

For the self-employed the main means of government support has been the SEISS grants. But while many of those on furlough payments have returned to work, lenders have been wary about making assumptions that self-employed income levels will automatically return to pre-pandemic levels in the current climate. As a result, there has increasingly been a reluctance to lend to those who have accessed this support.

Hollingworth says: “The use of the SEISS grants became less straightforward over time, and some lenders have been reluctant to use business income in mortgage applications if grants had been used after a certain time.”

Lentune Mortgage Consultancy managing director Stuart Gregory says: “The adjustments made by lenders include asking additional questions at the commencement of an application, particularly regarding any government support taken.

I don’t see, in the short term at least, that lenders will relax these additional checks

“To claim this support, businesses had to declare that they had suffered from a downturn in business levels. Lenders want to ensure these businesses are able to return to similar income levels seen before Covid.

“On that basis, many lenders are asking for evidence that the business involved is still trading and at similar levels to their last full year of company accounts, or in line with the most recent annual tax return.”

Supporting evidence

As a result, it is now becoming commonplace for both mainstream and specialist lenders to ask for at least three months of business bank account statements to support a mortgage application, he says.

Gregory adds: “I don’t see, in the short term at least, that lenders will relax these additional checks.”

Hollingworth says that this more individualised approach has had an impact on service, with the self-employed facing some substantial delays at the peak of demand.

At the start of the pandemic, lenders adopted a more cautious lending approach with both employed and self-employed borrowers. But while many lenders have now relaxed some these restrictions for employed borrowers, this has not yet filtered through to the self-employed market.

For example, Riemann says that in the early days of the pandemic many providers reduced the income multiples at which they would lend, and stopped including bonus income for employed applications.

Halifax only allows PAYE access to 5.5 times income, and TSB caps it at 4.49 times income for anyone who is self-employed

“The restrictions around bonus payments started to be reversed from late 2020 and through the early parts of this year,” he says. “But the self-employed have had to wait much longer to see their offering return to previous levels, and many lenders still impose restricted multiples to this day.”

This situation is not helped by the fact that there is often a time-lag, with the self-employed declaring their income up to a year later via self-assessment returns, he says. In many cases these are only now showing the full impact of Covid losses.

However, some brokers report that lenders are starting to look again at self-employed borrowers, particularly in the mainstream market.

The adjustments made by lenders include asking additional questions at the commencement of an application

SPF Private Clients chief executive Mark Harris says: “Underwriters were being very forensic at the start of the pandemic and, even where self-employed applicants could demonstrate their business was unaffected, they got caught up in the blanket approach of high-street lenders with reduced loan-to-income and loan-to-value.

“But now the tide has turned. Lenders are looking at the recent three-to-six-months’ trading and comparing it to pre-pandemic levels.”

Varying approaches

Approaches differ between lenders, and much will depend on whether borrowers have accessed support and on what date. Harris says Santander, for example, will not accept the application where any government assistance has been taken in the past three months. If the assistance was taken before that time, then any repayments towards this will be taken into affordability.

On the other hand, he points out that the Bank of Ireland will use the latest year’s income in isolation, so long as it is supported with evidence of recent trading activity to confirm the level is sustainable. This is through the bank’s bespoke propositions.

Harris says: “This underwriting approach will help self-employed applicants who have recovered well in the most recent year or have maintained good trading throughout the pandemic.”

Brokers will be looking for some realistic approaches from all lenders as we emerge from the effects of the pandemic

Harris adds that some lenders are still penalising self-employed applicants compared to those who are employed.

“Halifax, for example, only allows PAYE access to 5.5 times income and TSB caps it at 4.49 times income for anyone who is self-employed.”

Nationwide says self-employed borrowers can apply for any of its mortgage products up to 85% LTV, and the same rates and fees apply as those for employed borrowers. However, self-employed applicants will continue to be referred to underwriters who will confirm on a case-by-case basis if they require additional evidence to support these applications.

Hollingworth says that given these additional restrictions, this is an area where specialists can gain market share from the mainstream lenders. There is clearly scope to offer lending solutions to those with less of a track record when it comes to self-employed earnings, or those who are on the road to recovery but do not have enough documentation to evidence this.

Lenders such as Precise, Kensington, Pepper and Bluestone are already offering sensible propositions for this target market, he says

Hollingworth says: “This doesn’t mean that the mainstream will ignore the self-employed — there’s too much business out there for this to happen,  and many are now looking to relax their criteria to allow self-employed lending to continue.”

The furlough scheme helped employed borrowers to show ongoing income

However, he expects the specialist sector to increasingly play a key role.

“Of course, the more specialist a solution that is required the more impact there is likely to be on rate, so brokers will be looking for some realistic approaches from all lenders as we emerge from the effects of the pandemic,” says Hollingworth.

This will continue to open up opportunities for the broker market, he says, not only in sourcing these more specialist solutions, but working with clients to understand their business and income stream in order to put a viable case to lenders.