"Many lenders that advertise one-year’s accounts as a selling point will take a more cautious approach and instead base their affordability assessment on an average of the last two, or even three, years’ accounts."
Mortgage affordability continues to be a hot topic, particularly when it comes to the self-employed. According to data released by Mortgage Broker Tools (MBT) earlier this year, prior to the Mini Budget in September 2022, 28% of mortgage enquiries from self-employed applicants were unable to achieve the loan size requested as they were considered unaffordable. Following the Mini Budget, this number rocketed by nearly a third (32%) to 37% of self-employed mortgage enquiries that were considered to be unaffordable.
One challenge for the self-employed is the requirement of many lenders to provide up to three years’ worth of accounts to demonstrate the financial stability of their business. However, this period takes us back to a period of Covid lockdowns and severely suppressed economic activity, which had a negative impact on the earnings of many small businesses.
A number of lenders offer the ability to assess self-employed income based on the latest year’s accounts, which can help to overcome this issue. However, the feedback we have heard from brokers is that not all lenders stick to the criteria when it comes to underwriting an application. If a self-employed customer’s accounts show a significant increase in income in the latest year compared to previous years, many lenders that advertise one-year’s accounts as a selling point will take a more cautious approach and instead base their affordability assessment on an average of the last two, or even three, years’ accounts.
This has been the experience of broker Manooch Suree from Zinga Financial Services, who recently spoke with Pepper Money regarding a case he placed with us. The customer wanted a lender that was able to base affordability on one year’s self-employed accounts as their business has suffered a dip in income during Covid. Manooch initially tried to place the case with a high street lender, only for it to be declined after a lengthy wait of two and a half months.
Manooch says: “This case is not unusual. We are seeing a lot of cases stuck with underwriting for a long time with high street lenders. It may fit their criteria on paper, but often their underwriting doesn’t reflect this, particularly in the current environment. One year’s accounts are a great example of this. So many lenders say they will do it, but it rarely works, and they can be picky, will look at figures from further down the line and ask for more information. Often the underwriting comes back several times asking for more things.
"A lot of business owners who want to use their latest year’s accounts do so because they may have struggled with a dip in income throughout Covid, or for other external reasons. So, it’s natural that they may also have picked up some credit blips during this time. However, a combination of one year’s accounts and adverse credit is often thrown out by other lenders."
The message for brokers is clear. If you are working with self-employed customers who want to use their latest year’s accounts to help them demonstrate affordability, choose your lender carefully – many lenders will say they do this, but not all of those lenders will reflect their published criteria in their underwriting, and this could cause added time, cost and frustration for you and your customer.
