Self-employed Mortgages in 2021
For many self-employed individuals, the process of applying for a mortgage can be extremely frustrating, with long waiting periods between approvals and the continued need to provide evidence showing that you can pay back monthly repayments. However, with COVID-19, this process has continued to take a turn for the worse, with many banks refusing to offer mortgages to the self-employed. CIA Landlords has produced a study looking at key figures around self-employed mortgages, highlighting the UK’s attitude towards them as well as offering tips from experts when applying for a self-employed mortgage. 

27% of Self-employed Mortgage Loans Deemed Unaffordable in 2021

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With COVID-19 hitting the housing market so strongly, it has only added to the pressure for banks to give out affordable mortgage loans.  Casey Bridge, mortgage advisor at Hall & Costello Wealth Management shares his experience:"First of all, before COVID hit and there was no lockdown, it was very simple to obtain a mortgage as a self-employed person. Lenders would look at your last 2-years’ Tax calculations and Tax Year Overviews (TYO’s), and if the latest year was higher than the previous year they would either take an average of the last 2-years, or some lenders would go off the latest year which could produce a higher borrowing amount."If the latest year was lower than the previous, they would just use the lowest figure. If you are sole trader then it is net profits that lenders look at, but if you are a Director of a Limited Company, they look at salary and dividends."COVID-19 made it a lot harder for someone who is self-employed to obtain a mortgage."Lenders became extremely strict when self-employed people applied for a mortgage and decided to dig a bit deeper with these applicants to make sure that lending to them would not be risky."Research by Mortgage Broker Tools found that 71% of self-employed cases processed through its platform in January 2021 were affordable, with 27% deemed to be unaffordable based on the required loan amount.It also found that the average maximum loan offered to self-employed mortgage applicants is £221,400 - a decrease of 3% from the last peak in August 2020. Whilst the minimum loan available to the self-employed recovered to £118,800, a 45% increase on its lowest point last April and a rise of 43% on November’s figures. David Baird, mortgage and protections advisor at Aventur Wealth comments, “COVID-19 has had a huge impact on self-employed mortgages as we have seen increased discrepancy in the market.“From one major lender (Santander) restricting all lending for S/E applicants to 60% (In January - now at 75%) to others carrying on as normal it has caused more confusion for the average buyer.”“Personally I have not seen a decline in acceptance rates, instead it has caused an increase in time taken on my part in researching the right lender for the right applicant.” 

80% of Self-employed Brits Have Been Rejected When Applying for a Mortgage

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During a 2018 survey by TotallyMoney, self-employed workers expressed how they felt around the mortgage application process, why they were rejected and what they would suggest be improved. Below are some key statistics from the survey:When asked how individuals going through the mortgage process felt, they found that:When asked how they can improve the mortgage application process:

Construction Work Ranks As The Sector With The Most Self-employed

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The coronavirus pandemic has had a big impact on the self-employed industry, with many having to either stop work or look to change their profession in order to get work. As our study shows, the UK has a high number of self-employed workers in a variety of sectors, with construction being the highest.The sectors where the self-employed are:
Rank Sector No. of People Self-employed
1 Construction 920,000
2 Professional, scientific and technical activities 643,000
3 Wholesale, retail and repair of motor vehicles 396,000
4 Administrative and support services 361,000
5 Human health and social work 349,000
6 Transport and storage 324,000
7 Education 255,000
8 Manufacturing 246,000
9 Information and communication 240,000
10 Agriculture, mining, finishing, energy and water 218,000
11 Accommodation and food services 173,000
12 Real estate activities 86,000
13 Financial and insurance activities 86,000
14 Public admin and defence and social security 57,000
As of August 2020, there were more than 4.5 million self-employed people in the UK. This is broken up between 2.94 million males and 1.58 million females. Despite COVID-19 having a big impact on the self-employed, numbers have remained high, especially in the construction sectorThe construction industry has the highest number of self-employed workers at 920,000. The professional, scientific and technical activities sector follows as the second highest industry with 643,000 self-employed workers and wholesale, retail and repair of motor vehicles ranks third with 396,000 workers. 

The UK Ranks 20th As The Lowest Mortgage Interest Rate

One main talking point that would need addressing is the mortgage rates for the UK. For many, high interest rates cause the biggest setbacks when applying for a mortgage. The below table highlights the lowest to highest interest rates for mortgages for 20 countries around the world.
Rank Country Mortgage Interest Rate
1 Finland 1.41
2 Switzerland 1.45
3 Slovakia 1.51
4 France 1.54
5 Denmark 1.66
6 Belgium 1.76
7 Germany 1.85
8 Italy 1.90
9 Austria 2.06
10 Netherlands 2.14
11 Portugal 2.25
12 Spain 2.33
13 Lithuania 2.39
14 Estonia 2.52
15 Czech Republic 2.52
16 Latvia 2.67
17 Sweden 2.69
18 Norway 2.78
19 Slovenia 3.10
20 United Kingdom 3.15
Our study found that Finland has the lowest mortgage interest rate at just 1.41%. Switzerland falls second at 1.45%, with Slovakia ranking third with 1.51%.In comparison, the UK has more than double the interest rate at 3.15% - a potential problem for self-employed consumers when affording monthly repayments. 

Experts Share Insights Into Self-employed Mortgages During COVID-19

CIA Landlord Insurance
Kaan Emin, Mortgage and protection advisor and director at Apply Mortgages shares his tips and knowledge for those who are self-employed trying to get a mortgage.  

What are the difficulties self employed people face when applying for mortgages?

“Most self-employed people of which have taken help from the Government during the pandemic are being disadvantaged by lenders, ltd company directors on furlough are finding it difficult, they have to return off of furlough and evidence 3 months of business bank statements to evidence the same level of income they earned prior the pandemic.” 

What difficulties have you seen for self employed people when applying for a mortgage during covid? What has been the overall impact?

“Overall the industries of which have been asked to stop trading are the individuals who have been impacted most, the industries that have remained trading are ok, however some lenders have reduced the amount of borrowing not just for self-employed people but for all.“Some lenders are asking for 25% deposit, some are asking for 20%, 15% or even accepting 10% deposits. Previously you used to be able to borrow up to 5 times your income but during the pandemic this is now rare as lenders are usually giving 4.49 times salary of 4.75 times.“Extra information is being requested from applicants, previously business bank statements never used to be asked for, now they are requesting to evidence 3 months statements to evidence level of income.”

What are your top tips for self employed people when applying for mortgages?

David Baird also shares his knowledge;

Do you see mortgage applications changing in the future for the self-employed? Should there be a different procedure to help those who are applying?

“Yes 100%, there has already been an increasing move from lenders pre COVID-19 to take a more "common-sense" approach to S/E applicants and I can see this continuing going forward. An example of this is there were an increased number of lenders taking into account retained profit as well as directors remunerations to give a far more fair reflection of income for affordability.“I think we will see more lenders specialise in the S/E market over the next few years who with a specialist underwriting team who can take a more accurate view of S/E income.“The trend for more automation in terms of underwriting and assessment from lenders towards PAYE employed applications, means there should in theory be increased availability for human underwriters assessing S/E which can only be a positive.”COVID-19 has had a big impact on both the housing market and mortgage application process, with many being turned away or asked to provide higher deposit sums. For the self-employed in particular, new rules and regulations are seemingly needed to help give the best chance when getting onto the property ladder. 

Sources:

https://www.numbeo.com/cost-of-living/country_price_rankings?displayCurrency=USD&itemId=106&region=150https://www.statista.com/statistics/793372/value-of-residential-mortgage-loans-united-kingdom/https://w3.mortgagebrokertools.co.uk/https://www.gosimpletax.com/insights/self-employment-statistics/