Unusual trading years? Why flexibility is so important in the self-employed mortgage market

During Covid, criteria and lending was tightened in the mortgage market for those who were deemed riskier borrowers. With their complex income and employment, this included the self-employed.

According to data released by Mortgage Broker Tools in March, before the mini Budget last year, 28% of mortgage enquiries from self-employed applicants were unable to get the loan size they needed, as they were considered unaffordable. Following the mini Budget, this number increased dramatically to 37% of self-employed mortgage enquiries.

Options have improved but with rising interest rates and dramatically increasing costs, many self-employed borrowers are still struggling to find the right mortgage deal.

After a dip in the number of self-employed workers in the first year of the Covid pandemic, ONS figures show that both full-time and part-time self-employed workers have increased to 4.4 million in the latest quarter (Jan to Mar 2023), up 4%.

Many self-employed remained in their roles but reclassified their status as ‘employees’ during Covid, coinciding with the furlough scheme. The recent upturn in the number of self-employed could indicate a growing need for mortgage options for those with complex income.

Brokers need to be approaching lenders who can be flexible, who can lean on their understanding of the self-employed and who have specialist underwriters who can look beyond the surface to make decisions.

What specialist lenders can consider

Some lenders, including ourselves, will look at accounts prior to submission which can help when an applicant needs to use both salary and net profit.

Unusual trading years can be explained by accountant commentary, or lenders could look at the year prior to two years ago to get a better understanding of the business. It’s all about having the ability to bounce the case off a business development manager and a decision maker, so time isn’t wasted for the applicant, broker, or ultimately the underwriter.

Ultimately, how an underwriter interprets accounts will depend on the lender, but generally;

• For limited companies, if applicants have over a certain financial stake in the business, a lender can consider their proportion of net profit and salary over the most recent years rather than their dividend income.

• The last two years latest audited accounts (prepared by a certified or chartered accountant) to determine whether the income appears reliable.

• Or alternatively, the most recent SA302 or online HMRC Self-Assessment Return showing the tax calculation of the income and tax overview if dividend income is to be utilised.

• An accountant's reference or other corroborative information.

Unusual trading years

It’s important to find a lender who can look at profit with a common-sense approach. Profits aren’t always going to follow a straightforward trajectory. Sometimes they’ll rise then fall. Sometimes they’ll fall then rise, and sometimes they’ll rapidly increase. Quite often, after the purchase of assets or following unusual trading years such as those affected by Covid, profits take on a rollercoaster path.

We recently underwrote a case for Mr and Mrs Fargher, property developers who’d experienced a mixed couple of years of trading. Profit was up in 2022, but down in 2021 and average dividends alone were insufficient for affordability. They’d recently launched a new business that had made a small loss in the first year, and at 66 and 67 they were also approaching retirement. However, they were able to provide an accountant’s letter which not only explained their business model, but showed a very positive future plus significant assets in the business. We were able to lend over a seven-year term, taking them up to age 75.

Lenders who underwrite manually have the ability to really understand the detail of the case, getting the full picture income and profit, and are much more able to consider complex cases.

The power of an accountant’s letter

An accountant’s letter can be invaluable. It can give a lender much more understanding of a business, how it might improve, other assets they may not be aware of and more recent trading information.

To use a case study as an example, Sarah Healey had provided two years of accounts where the profits had risen quite dramatically in the last accounting period. Many lenders, including ourselves, would be nervous of solely using the latest year’s profits. However, we were provided with an accountant’s letter that confirmed turnover had further increased substantially in the first five months of the current accounting period. This gave us the confidence to lend solely using the latest year’s accounts for affordability purposes.

Advisers should be able to think outside of the box when it comes to flexibility, advocating for their clients by asking what additional evidence or support a case might need to get it over the line.

Age isn’t a stumbling block

ONS data shows there are a growing number of older people in the UK, with the figure set to increase even further by 2045 - in part due to the baby boomers from the 1960s now being aged around 80 years as well as general increases in life expectancy, changes to pensions and people working well beyond ‘normal’ retirement. UK Finance data showed that 2021 saw the highest volume of lending to over 55s since 2014, and four out of five loans were standard mortgages.

Therefore with a growing demand by applicants later in life, it’s important to find a lender with generous terms and check what age they’ll accept applications to – normally lenders who can manually underwrite can be more flexible on age criteria. For example, at Family Building Society, we’re able to lend up to 95 at the end of the term for owner occupier repayment mortgages, or up to a maximum age of 89 when the loan commences for owner occupier interest-only and buy-to-lets.

This case study shows how pension can be used alongside profit and income to improve affordability. Mr and Mrs Lamb were aged 63 and 65 when they approached us. In three years’ time they’d be able to draw on their significant pensions. They had a small business, and despite decent profits, trading had been quite volatile. As we knew they’d soon be receipt of their pension, we were able to bridge the gap until they’d be able to draw down on their pensions, using an average of the last three years profit plus their directors’ salaries. We were able to offer a five-year fixed rate on a 20-year term which would take way past retirement age.

Understanding an applicant’s income allows lenders to be flexible in how they can use profit, pension and income to make a sensible lending decision.

Conversation is key

If you have a complex enquiry, discuss it prior to submission with a business development manager. Usually, you’ll just need to supply the relevant documents such as two years of accounts of the clients’ businesses and/or a SA302 tax return evidencing their profits, so an underwriter can fully understand the enquiry. You’ll be able to ask additional questions to ensure they have enough information to agree the enquiry in principle, so you can be confident when submitting the application, subject to full underwriting and valuation should the application proceed to offer.