"If lenders and brokers continue to work together, we can make homeownership more attainable for the growing community of entrepreneurs and freelancers."
Perhaps one of the least surprising revelations in the latest Pepper Money Specialist Lending Study is that self-employed individuals continue to face substantial challenges in securing a mortgage. According to the research, nearly three-quarters of self-employed respondents (72%) believe their employment status makes getting a mortgage more difficult, with almost half of them (46%) saying it makes the process significantly more challenging.
These findings underscore the need for a more nuanced approach to lending for self-employed individuals that goes beyond the rigid approach to assessing income, which is typically applied by many lenders based on a three-year average of submitted accounts.
Our research shows that close to a third (29%) of business owners have experienced a 10% or more increase in profits over the last year, with some (15%) reporting a profit boost of 20% or more. This reflects data by Statistica, which says there has been a growing trend in self-employed profitability in recent years.
This increase is a testament to the resilience and adaptability of business owners, but with many lenders, growing businesses aren’t rewarded with increased mortgage affordability. However, this isn’t always the case, and some lenders – like Pepper Money – can assess self-employed income based on the latest year’s accounts. This means that the successful owners of growing businesses could be rewarded with larger loan sizes that help them achieve their goals.
Another challenge for limited company directors is that they often only draw the money they need from a business to reduce their personal tax liability. They decide to retain some of the net profit within the business instead of paying it all as dividends to facilitate further growth or for tax purposes. This can help to reduce their tax bill, but it also limits their borrowing power when applying for a mortgage.
In the right circumstances, net profit can be seen as income that the customer can take in the form of dividends at any time. So, at Pepper Money, we’ve introduced the ability to use net profit retained within the business as part of the affordability calculation for limited company directors.
Under the new criteria, we’re able to use net profit within an affordability calculation where a customer is a majority shareholder in the business, owning 50% or more. We’ll use the share of net profit in line with the customer’s share of the business. So, for example, a 60% shareholder would take 60% of the net profit figure. Where joint applicants have a combined shareholding of 100%, we can take 100% of the net profit.
Lenders have traditionally taken a rigid approach to underwriting self-employed income, so it’s perhaps unsurprising that so many self-employed people think securing a mortgage will be such a challenge. However, with more lenders, like Pepper Money, taking an increasingly progressive approach, we’re helping to create an easier path for the self-employed.
The Pepper Money Specialist Lending Study findings are a powerful reminder of the work that still needs to be done, both in terms of proposition development and education. But if lenders and brokers continue to work together, we can make homeownership more attainable for the growing community of entrepreneurs and freelancers.
