If you’re self-employed, getting a mortgage without the right advice can be a challenge. And, after a year of disrupted income, many experts are reporting that it’s getting tougher for business owners and freelancers to obtain the finance they need.
We’ve previously shared some tips to help you if you’re self-employed and looking for a mortgage in a post-Covid world. However, if you took advantage of any of the self-employed support measures the chancellor made available during the last year, this could hamper your chances of getting the mortgage you need.
Read on to find out more.
Use of the coronavirus support schemes seen as a “red flag”
If you’re self-employed and you either used a government grant, or furloughed staff, it could adversely affect your borrowing potential. This is because some lenders are viewing the use of these schemes as a “red flag”.
Several of the UK’s major banks will not accept your application if you received a grant under the Self-Employment Income Support Scheme (SEISS) after July 2020.
Barclays and NatWest’s current policy excludes borrowers who applied for grants under the SEISS. While both banks are reviewing this, neither will currently lend to you if you benefited from government support.
Meanwhile, Nationwide has confirmed it has no plans to change its stance on contractors. Before the pandemic, the building society used 80% of your annualised day rate when calculating how much you could borrow. This was reduced to 50% in 2020, and there are no plans yet to revert to the original calculation.
Seeking advice here is crucial. While it may seem unfair that you can’t get a mortgage if your business was forced to close during lockdown, there are lenders who can look more favourably at applications from self-employed people. Get in touch with us for advice.
High loan-to-value borrowing also tough for self-employed workers
Another factor that is making it tough for self-employed workers is that many lenders have tightened their credit score for borrowers with a smaller deposit.
As a self-employed borrower, you might prefer to borrow a greater proportion of your home’s value rather than use up all your savings. However, getting a higher loan-to-value mortgage has also proved tough in recent weeks.
While some lenders do have “low deposit” options, these deals are typically reserved for applicants with an exceptionally high credit score.
2020 accounts proving problematic for many borrowers
One of the other issues that is affecting self-employed borrowers is the dip in income they may have generated during 2020.
As a self-employed applicant you typically have to provide two years of accounts to a lender to prove you can afford the monthly repayments. Most lenders use an average of your earnings over the last two years to determine what you can borrow.
If your business struggled during repeated lockdowns, it’s likely your bottom line could have taken quite a hit. The impact of the pandemic may well have been significantly reduced profits that represented a blip on an otherwise successful business.
Using the current affordability assessment methods and taking an average of your earnings, your borrowing potential could therefore be reduced. And, as time progresses, lenders will begin to argue that 19/20 accounts are too old to rely on (as the most recent year) and so they will start to request 20/21 accounts.
This could damage your chances of getting a mortgage until 2023 unless lenders adopt an alternative approach.
We work with lenders that can help self-employed applicants
While many lenders are scrutinising self-employed borrowers more harshly, we do work with several lenders who are happy to consider self-employed applicants.
These tend to be lenders who use manual underwriting and take less of a “tick box” mentality to applications. For example, they may look at your business bank statements, or your accounts pre-pandemic to determine affordability.
For example, Santander has recently announced that it will disregard accounts for the 2020/21 tax year for businesses that had lost earnings during the pandemic. Instead, it will assess self-employed income on accounts from the previous two years.
Get in touch
We have wide experience of working with self-employed borrowers. Using our expertise and network of contacts, we work closely with a range of lenders to obtain the finance you need.
To find out how we can help you, please get in touch. Email [email protected] or call us on +44 (0) 20 3786 7270.
