Self-employed individuals in the UK face significant challenges in accessing mortgage opportunities, as highlighted by a recent study.
- 72% of business owners find that self-employment complicates the mortgage process, with nearly half finding it significantly more difficult.
- Despite showing financial growth, self-employed borrowers often struggle with lenders’ affordability calculations based on outdated income assessments.
- Limited company directors encounter additional hurdles due to retained profits affecting borrowing power.
- Progressive lenders are adopting flexible underwriting practices, improving mortgage access for the self-employed.
In the UK, self-employed individuals have reported substantial difficulties in securing mortgages, as underscored by the latest findings from Pepper Money’s Specialist Lending Study. Nearly three-quarters of these business owners acknowledge that their self-employment status introduces hurdles that complicate the mortgage process. Indeed, 46% of them feel that obtaining a mortgage is significantly more challenging due to their self-employment.
The study has uncovered promising financial trends among the self-employed, with 29% of participants noting profits that have increased by at least 10% over the previous year compared to the last two years, and 15% experiencing profit boosts of at least 20% in the same timeframe. Despite this positive financial trajectory, many self-employed individuals face obstacles in proving affordability to potential lenders.
A key issue arises from the common practice among lenders of assessing affordability for self-employed clients on an average of the preceding three years’ submitted accounts. This method is at odds with the reality that a substantial portion of business owners have seen their income increase notably over the past year. Ryan Brailsford, director of business development at Pepper Money, highlights that lenders’ rigidity in their calculations fails to capture the current financial state of self-employed borrowers.
Moreover, limited company directors are often challenged by the decision to retain some profits within their businesses rather than distributing them as personal dividends. While this approach may reduce personal tax liabilities, it simultaneously limits their borrowing potential when applying for mortgages.
Fortunately, there is a progressive shift in the market. An increasing number of lenders, including Pepper Money, are adopting criteria that consider a borrower’s latest year’s financial performance or profits retained within the business. This shift towards more flexible underwriting practices takes into account an individual’s unique circumstances and financial realities. Adam Hinder, CEO of Simply Lending, points out that such practices not only enhance opportunities for self-employed individuals but also empower brokers to assist a wider range of clients in acquiring the mortgages they need.
The evolving lending landscape is gradually easing the path to mortgage accessibility for the self-employed, offering renewed hope in an otherwise challenging process.
