"While there remain some good options for the self-employed, the choice of lender is crucial, and this means comprehensive research of all the available options."
There are now seven different ways a limited company director’s income can be taken; CIS contractors can be assessed as it they are employed, IT contractors can use their gross daily rate, to name but a few.
Lenders were naturally cautious in the immediate aftermath of the Covid lockdown, but, with the exception of some business owners working in hospitality and travel, this only lasted a matter of weeks. In fact, in the latest MBT Affordability Index, 73% of self-employed applicants were offered the loan size they requested, compared to a whole of market average of 75% - so not much different.
However, this only tells half the story. With most self-employed people now having filed their latest tax returns, they should have their 2020/21 & 2021/2022 figures available to demonstrate earnings. For many, 20/21 was a decent year and some businesses have gone from strength to strength over the last two years, especially in IT and recruitment. But whereas employed candidates can get a mortgage based on an offer of a job that doesn’t start for three months, the self-employed are still being treated differently.
LTV restrictions remain in place with some lenders, as do maximum loan to income ratios, and increased scrutiny continues to be the norm for self-employed. One major lender, that always used to take the latest year’s net profit, has decided to use an average of previous years. And this is on top of already restricting self-employed applications to 75% maximum LTV.
Different lenders will always take a different approach to different types of income, but there appears to be a widening gap with some lenders in the way they treat the self-employed, compared to employed applicants. There have been anecdotal stories of business owners being penalised for making use of government support schemes for small businesses and even furloughing staff rather than making them redundant as this has resulted in their accounts showing a large input from government grants.
These considerations are likely to recede next year when Covid related payments no longer appear in the most recent set of two-year accounts, but until then it seems that the self-employed are still suffering a form of long Covid in their treatment by some lenders.
The takeaway for brokers is that, while there remain some good options for the self-employed, the choice of lender is crucial, and this means comprehensive research of all the available options. Often the best choice for a self-employed client may not be with a lender that is first considered.
The self-employed can be treated fairly when it comes to affordability. You just need to know where to look.
