Self-employed workers face stricter mortgage checks: how you can improve your chances

Mortgage lenders are adopting stricter criteria for self-employed workers, because of the pandemic.

Natwest won’t accept applications from individuals who took income support grants from the government and other lenders are tightening the purse strings around the amount they'll let self-employed workers borrow.

Now, another of self-employed renters don’t believe they’ll ever be in a position to buy their very own home, according to research from Aldermore Bank.

Here, Which? explains the challenges facing self-employed borrowers and offers suggestions about using your odds of obtaining a home loan.

Self-employed workers pessimistic about mortgage chances

A new report by Aldermore has shown how the challenges faced by self-employed workers happen to be worsened by Covid-19.

More than the usual quarter of self-employed people (28%) told Aldermore that saving a first deposit had become harder due to the pandemic, while one in five (18%) said they’d been forced to delay their plans to buy a home.

The biggest issues were around getting accepted for a mortgage. 64% of respondents said they believed banks treat self-employed people worse compared to those in salaried employment, while 32% said they’d been rejected simply for being self-employed.

Jon Cooper of Aldermore says: ‘It is disappointing to see persistent barriers for self-employed people looking to secure a mortgage, which have been exacerbated by the pandemic.

‘Self-employed workers with seasonal or variable income streams might not fit the tick-box approach of numerous high-street lenders, but specialist lenders can dig into the detail to make sure they've possibilities to get on towards the housing ladder’.

Has it become harder to obtain a self-employed mortgage?

Getting a home loan like a self-employed worker has always been more complicated, but the pandemic has added greater uncertainty, with banks reluctant to undertake the things they perceive to be ‘riskier’ lending.

Lenders are adopting stricter criteria than ever before. Natwest won’t accept applications from individuals who took income support grants in the government, while HSBC and Yorkshire Building Society require evidence that the company has recovered in the pandemic.

TSB, meanwhile, is only going to allow self-employed people to borrow 4.25 times their annual income, compared to 4.75 times for non-self-employed workers earning over lb40,000.

Other lenders are requesting bigger deposits. Santander is only offering self-employed mortgages at as much as 75% loan-to-value (LTV), Metro Bank has set an 80% limit for all those who’ve taken income support grants, and Nationwide is only going to lend at as much as 85%.

Will things improve for self-employed borrowers?

This might paint a bleak picture for self-employed borrowers, but there are several glimmers of hope.

Santander requires bigger deposits than ever before, but it has had the lead in allowing applicants to disregard their accounts from the 2021/21 tax year. Natwest, meanwhile, has announced it'll launch new self-employed criteria next week.

The situation is ever-changing at the moment, leading to wildly differing criteria along with a risk-averse approach from lenders, however, if the economy recovers well from the pandemic, banks can start to loosen the purse strings.

In the meantime, self-employed applicants may have greater joy considering building societies and specialist lenders, who may assess applications on the case-by-case basis rather than using blanket eligibility criteria.

Tips on getting a mortgage when self-employed

1. Take advice from a mortgage broker: Whether you’re buying a home or remortgaging, professional advice is essential in being able to navigate the mortgage market. A mortgage broker will be able to assess your financial circumstances and analyse which lender is going to be most likely to offer you a deal. This can save time and prevent failed applications, which could have an adverse impact on your credit report.
2. Use an accountant: Banks are requesting more evidence than ever before, so it’s essential that your numbers accumulate. Some lenders is only going to accept applications in case your accounts are signed off by a certified or chartered accountant. One word of warning – it’s common for accountants to legally minimise your declared income so you’ll pay less tax, but a lesser profit could affect how much you can borrow when applying for a mortgage.
3. Get your paperwork in order: Lenders will often require three years of accounts. Accountants will usually provide your annual tax calculation (the SA302 form) as evidence. If you file your taxes online, you can access this type by logging into your account. Should you file by post, you’ll have to contact HMRC. Be sure you have these documents before you apply.
4. Ensure your credit score is up to the mark: Before applying for a home loan, ensure everything is correct in your credit report. For example, are you currently on the electoral roll at the current address? There are lots of steps you can take to boost your credit report, including paying off outstanding debts and closing dormant accounts. Be careful about your spending habits around before you apply for a mortgage, as lenders are more likely to bear this in mind.
5. Save a bigger deposit: It’s a difficult market, and the bigger your deposit, the easier you'll find it to obtain a mortgage. Once we mentioned earlier, you may want to save a 15% or 20% deposit, and when you have not been self-employed for very long or even the pandemic has significantly affected your earnings, you might need a bigger down-payment.