Can self-employed borrowers still be classed as 'complex income'?

Grant Hendry, director of sales at Foundation Home Loans, says lenders' underwriting processes must match the growing number of people looking beyond a more ‘traditional’ employment status.

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Grant Hendry | Foundation Home Loans
25th September 2023
Grant Hendry FHL
"Times where self-employed borrowers are classed as a complex income outlier are gone."

Complexity is a word which is open to interpretation, and this is especially apparent for lenders operating within the residential mortgage space.

Inevitably, lending approaches vastly differ and, as such, some borrowing scenarios will be deemed too complex for those with stricter, automated underwriting boundaries. This does lead to the question of whether such boundaries should be wider in a time when borrowing scenarios and individual circumstances have shifted. However, that’s for each and every lender to decide after taking into account a number of influencing factors from product type to risk appetites through to funding lines and service capabilities – plus everything in-between.

The needs of the self-employed population have often been deemed to be beyond these stricter, automated underwriting boundaries, mainly due to the ‘riskier’ and fluctuating nature of their revenue stream(s). As I’m sure we’re all aware, there is no great difference between the structure of the actual mortgage offered to self-employed clients compared to those who are employed.

The difference comes in how the loans are assessed and how businesses are structured. By this I mean different businesses have varying strategies when it comes to things like cash flow, managing balance sheets, and in terms of how they distribute profits and dividends.

This demonstrates the importance of lenders being able to not only assess each application on its own individual merits but also in aligning this with an underwriting process which can provide the ability to look beyond a more ‘basic’ overview of incomes and creditworthiness for such borrowers.

Times where self-employed borrowers are classed as a complex income outlier are gone. The rise of the gig economy, changing work habits and outlooks, in addition to rising living costs across the board are all factors which have – either through choice or necessity - encouraged a growing number of people to look beyond a more ‘traditional’ employment status and to also seek additional sources of income. Factors which forward-thinking lenders are recognising and acting upon.

The final point around additional sources of income was evident in recent data from Indeed Flex which outlined that almost a third of UK homeowners (30%) are picking up extra work to boost their savings ahead of their mortgage repayments increasing. Rather than waiting to see how much their savings will be hit, nearly a third of homeowners (30%) due to remortgage in the next 12 months are already making extra money by doing additional shifts or taking on side hustles — including temporary work — to shore up their finances.

Three in ten of those taking on extra work are aged 25-34. This demographic is typically newer to the housing market, meaning repayment rates are likely to be higher compared with older owner-occupiers. Roughly a tenth (11%) of those aged between 55 to 64 are also pursuing additional employment to cover increased repayment costs.

This data highlights some of the financial realities facing existing and potential borrowers in what remains a challenging financial climate for many. And this is a climate where specialist residential solutions which incorporate a manual underwriting approach can help ensure that the all-important self-employed population and those with complex incomes have access to responsible and competitive solutions which match their homeownership aspirations.

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