Why it has never been harder to get a mortgage if you are self-employed
Freelancers have always had to work harder than the employed to get on the property ladder.
When it comes to mortgages, banks simply prefer the predictable income of the regular nine-to-five office worker.
Indeed, self-employed borrowers were almost locked out of the mortgage market altogether during the pandemic, as freelancers found themselves out of work and banks reigned in lending.
But the self-employed now face their biggest challenge yet, as rising costs and a stuttering economy spark a fresh credit crunch.
Lenders are increasingly quizzing owners of limited companies on how their business will afford inflated energy and running costs this year, while sole traders are being asked to reveal exactly how much they spend on electric and gas.
Nick Mendes, of broker John Charcol, said: “The self-employed will be no stranger to lenders asking for more information or references from an accountant on the strength of the business.
“But this time round expect lenders to request information on the impact of inflation, the energy crisis, the pandemic and Brexit.
“Some lenders are even asking which energy supplier an applicant is with – that was not common at all previously.”
It comes at the busiest time of year for mortgage applications among freelancers.
There were almost 105,000 searches for self-employed mortgages last month, according to Twenty7Tec, a mortgage company. Demand for self-employed loans was the highest ever recorded in the month of January and marked a 19pc increase compared with the same month in 2022 and a 40pc jump compared with January 2021.
The company expects February to be another record-breaking month for self-employed mortgages, as sole traders and small business owners begin their search after filing their self-assessment tax return at the end of January.
Nathan Reilly, of Twenty7tec, said: “As soon as the self-employed have filed their tax returns, and have a clearer picture as to how well their business has performed in the last year, our brokers see a spike in mortgage searches.”
But mortgage affordability for self-employed borrowers has fallen below pandemic levels, exacerbated by soaring interest rates, according to research by Mortgage Broker Tools.
Only 65pc of self-employed applications were considered affordable at the end of last year, the lowest level since the company began tracking the metric in 2020.
Volatile and complex incomes leave self-employed applicants open to increased scrutiny by lenders who require additional proof a borrower will be able to afford repayments.
This intensified during the pandemic and while lenders have since relaxed their affordability criteria in some areas, borrowers face a new challenge – growing profits.
Mr Mendes said: “Many businesses will have seen profits increase dramatically following the pandemic. But despite this being a positive, some lenders will still have restrictions on this.
“Lenders want consistency and need proof that a spike in income is sustainable to meet mortgage repayments.
“If your income or profits have grown too much in comparison to previous years they will instead use the lower amounts, which is really frustrating.”
Freelancers, sole traders and small business owners hit hard by successive lockdowns, but who have since begun trading at full capacity, will be especially vulnerable to tighter affordability restrictions – such as those in the hospitality sector.
Mr Mendes said one specialist building society would only use the latest year’s income figures for a self-employed applicant if they were less than 20pc higher than the previous year. If income had jumped by more than a fifth, they would instead use the average of the past two years – coinciding within pandemic restrictions, he said.
Another building society requires an accountant to provide a “satisfactory explanation” if profit has fluctuated by 15pc or more year-on-year, Mr Mendes added.