"We do need to recognise that when it comes to how some lenders approach the finances of self-employed mortgage borrowers, there can be significant discrepancies."
At a certain point in life, most people will feel the appeal of being able to work for themselves, and its clear from the statistics that more individuals are finding their way to self-employment, even if we have seen a drop-off in these numbers since the pandemic.
Perhaps, unsurprisingly, at that point – just a few years ago – many hundreds of thousands of people in the UK were either actively deciding self-employment was for them, or via a range of circumstances, finding themselves in a situation where they had to work for themselves.
Government statistics reveal that, at the start of 2020, the number of self-employed in the country had risen to a high of five million, and while – as of February this year – that number had come down to 4.26 million, it is still some way above a low of 3.2 million, in December 2000.
It perhaps says something of our working lives, that it is those who are aged between 45-54 years old, who are most likely to be self-employed, and with a sizeable number based in London (757,000) and the South East of England (644,000).
Gaining experience in a sector over the early part of a working life clearly gives you a much greater chance of moving into self-employment during the ‘middle years’, and one presumes from those figures, that living in certain areas of the country, particularly the South with its commuter links to London, etc, makes that opportunity a bit more tangible.
However, as we know, from an income point of view, self-employment can be viewed very differently, particularly by high-street lenders who have often had difficulty getting to grips with the finances of the self-employed, particularly over the period when they have moved to this status.
It’s also the case that income can fluctuate more for the self-employed, and not necessarily from a higher to lower income. Many individuals who make the move to self-employed boost their incomes significantly, feeling the benefits of working for themselves, deciding their own rates, cutting down on costs perhaps by working from home, or indeed all of the above and then some.
However, we do need to recognise that when it comes to how some lenders approach the finances of self-employed mortgage borrowers, there can be significant discrepancies. And, of course, in a large number of cases, the self-employed move into the realms of specialist residential lending, having not been deemed appropriate by the high-street.
We certainly see a wide range of self-employed borrowers via mortgage advisers, and it is important to have a hands-on, individual-focused approach to underwriting these cases, particularly for those clients who are perhaps in the first year of trading after going self-employed, or they may have joined a new business as a self-employed partner part-way through the tax year.
It's highly likely their finances pre- and post-moving to self-employment might look very different, and as a specialist lender in this market, we have to be flexible. Recognising, for instance, that a drop in profitability one year doesn’t always show the full picture, plus of course, only having one year’s accounts doesn’t mean the client is new to the business or industry.
Looking at the client in the round is critical – if one year’s accounts show a drop in profit, what is the reason for this, can we have a projection for the next year, might we able to use the previous year’s instead if the drop has been explained and accepted?
How is the individual being paid? We’re able to use net profit and salary or salary and dividends, whichever works best for the client, plus we can take into account whether they plan to run their business past state retirement age; if it’s non-manual work, we can take their self-employed income into account up to age 75.
And the experience of the client is also reviewed – have they worked in the industry prior to being self-employed? Have they the experience and therefore are more likely to have longevity in that space and continue to be successful? It’s not simply a review of the situation now, but an understanding of where they have come from and where they are going.
Overall, it should mean self-employed individuals – whether looking to purchase a first home, move up the ladder, or remortgage an existing home – have options available to them, and they have all their individual circumstances taken into account.
Given over four million people currently fit this particular bill, it’s incumbent on us all to work together to understand their work and financial situation, and their ambitions for the future, plus ensure they can continue to buy, and live in, their homes. Whether they work from them or not.
