By Pete Mugleston, Online Mortgage Adviser
Changes to the Self-Employed Market Since the Credit Crisis
After the credit crunch in 2007/2008, the amount of cash available to mortgage lenders dwindled massively, leaving them with higher demand than supply. Many institutions shut up shop leaving those remaining active in the market to pick and choose who they lent their cash to.
The knock on effect of this, coupled with tighter FSA regulation and falling house prices, meant that certain types of borrower who once had no issue finding finance, found it impossible. These included; borrowers with adverse credit (even mild adverse); borrowers with smaller deposits; and perhaps more notably, the self-employed.
Self-certified mortgages were designed to help self-employed borrowers apply for lending based on income they tell the lender they earn, without evidence. Great, if you have a decent turnover and declare high expenses on your accounts, as most lenders would be looking at net profits for affordability. However self-cert lead to some major issues in the market, with some borrowers biting off more than they could chew, and others exploiting the lack of regulation leaving lenders open to fraud.
When these types of mortgage were removed from the market, many self-employed applicants found themselves with higher loans than lenders now deemed affordable. Unable to refinance with another lender, many of those borrowers were trapped on higher rates than they could find elsewhere, and others on ‘non-portable’ deals were unable to move house.
It also meant the self-employed could no longer have the best of both worlds when it comes to paying less tax by declaring a lower personal income, and borrowing what they want. Now, if you want to borrow you’re going to have to pay the tax.
Recent improvements in the market
The last 12-18 months has seen some big developments in the mortgage market. With house prices on the rise and lenders finding finance more readily available, lending criteria across the board has relaxed, allowing many of the borrowers who were overlooked in previous years to find finance.
It’s highly doubtful the FCA would ever allow regulated self-cert mortgages to return, but the lenders themselves have moved into certain areas where improving their criteria has really benefitted people who work for themselves. For example; lenders using just the most recent years’ accounts to verify income; lenders considering businesses that are only a year old; lenders being more flexible when it comes to historical or recent declining profits; lenders considering retained profits instead of personal income withdrawn; to name a few.
The landscape of employment continues to change, with many businesses employing staff on temporary contracts, fixed term contracts, and zero hours contracts, as well as Construction Industry Scheme workers, who are a mixture of employed and self-employed. All of these income types cause borrowers issues because most lenders will decline or place strict requirements upon the evidence, requesting a 2 year history of the income and streams of payslips, or even not taking into account more than 50% of the income. Thankfully however, there are several lenders who specialise in these areas that can accommodate borrowers with not so straightforward income types, often offering deals at high street rates.
There are also several lenders that consider applicants with adverse credit alongside self-employed income, which is ideal for those business owners who had issues during the height of the recession and have since recovered, either with a new business or a surviving one. These lenders can approve people with CCJ’s, default’s, IVA’s, and even bankruptcy so long as enough time has passed (usually 2-3 years).
It’s true to say that the future is certainly looking bright for just about anyone looking to purchase a property or refinance – sole traders, partners, and Ltd company directors included. What we do at online mortgage advisor is put potential borrowers in touch with absolutely the right person, someone who arranges this type of mortgage every day.