How the credit crunch hit self-employed mortgages

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How the credit crunch hit self-employed mortgages

Credit crunch woes and subsequent legislation have combined to make things tougher for self-employed people seeking to get a mortgage.

According to John Phillips, group operations director for Spicer Haart and Just Mortgages, lenders will "still look" at the self-employed, but are "much tougher with their criteria".

"Lenders are also stricter regarding the evidence of income they want from self-employed people", he says. "This means they have to declare far more of their income if they hope to get a mortgage."

There are many reasons why things have tightened up over the past few years.

Buster Tolfree, commercial director for mortgages at United Trust Bank, comments: "Immediately following the credit crunch, most lenders took a more risk-averse approach to self-employed customers.

"Criteria such as longer minimum time of self-employment, higher minimum income and lower maximum loan-to-values were seen."

Dearth of self-certified mortgages

Before the credit crisis of 2008, self-certification mortgages were prevalent.

Often called 'liar loans', as clients could over-estimate their expected annual income when completing applications for a mortgage because the lenders were not checking for proof of earnings, the mortgages proved popular with contractors, self-employed people and those whose earnings were based on bonuses and commission.

Only a limited number of lenders will work through accounts to fully understand the real income levels. This means those customers may have to pay higher fees or rates, as the process is more labour intensive.Rob Sinclair

However, fears of a raft of bad loans after the credit crisis revealed inherent weaknesses in the lending process, banks and other lenders shied away from lending without proof of earnings. 

With the FCA's 2014 Mortgage Market Review, and in the 2015's European Union Mortgage Credit Directive, mortgage lenders and brokers now have under a regulatory obligation to obtain proof of earnings and affordability.

Donna Hopton, founder of the Cherry forum for brokers, comments: "Before the credit crunch, mortgages such as non-status and self-certification went some way to alleviate the difficulties this type of borrower experienced.

"However, with the crunch and the advent of much stricter criteria, as well as more stringent stress-testing, all mortgages now have to be on a full-status basis."

This means, when calculating income multiples, borrowers are having to use "very limiting declared taxable income", she says, "meaning lending to the self-employed has been greatly reduced and it appears likely it will stay this way for the foreseeable future."

Jamie Smith-Thompson, managing director of advisory firm Portafina, agrees. He says: "We no longer have an abundance of self-certified offerings and lenders have become a lot more specific about what they will accept. This means finding a suitable lender is now a lot harder."

Rob Sinclair, chief executive of the Association of Mortgage Intermediaries, adds: "Many self-employed people are allowed to make deductions which reduces their taxable income, and many pay accountants to optimise this opportunity.

"This now works against individuals in making a mortgage application, as only a limited number of lenders will work through accounts to fully understand the real income levels. This means those customers may have to pay higher fees or rates, as the process is more labour intensive."

For Louisa Sedgwick, director of sales for Vida Homeloans, since self-cert disappeared from the market, independent advisers have come into their own.

She explains: "Self-employed borrowers have tended to seek the advice from professional mortgage brokers who are well placed to assist the self-employed in getting a mortgage."

The outcome

While the mortgage industry agrees some element of regulation and better affordability checks have been a good thing, the upshot of increasing red tape means it has made it harder for advisers and their self-employed clients to get a mortgage.

According to Charles Haresnape, group managing director for Aldermore: "Recent years have seen a general tightening of credit conditions, whether through the implementation of the Mortgage Market Review, the Mortgage Credit Directive or, more recently, the greater controls placed on the buy-to-let market.

"While these new rules should not necessarily be viewed as a bad thing, as the aim was to discourage irresponsible lending, those borrowers on the fringes always tend to struggle more, including self-employed borrowers."

Keith Street, vice-chairman of group lending for The Northview, comments: "Since the financial crisis, the mortgage market has changed significantly, both from a regulatory point of view and from a lender's perspective."

He outlined these as follows:

This is despite the strength of the freelance economy and the growth of self-employed entrepreneurs in the UK.

Mr Street says: "This is even more prevalent with the segment of the population that has seen growth of over half a million since the financial crisis: the self-employed."

According to Matt Andrews, managing director at Bluestone Mortgages, the economic environment and general outlook should provide some comfort to lenders that the self-employed are in a much better financial position now than they were in the run-up to the 2008 crisis.

He explains: "The UK has been enjoying low levels of unemployment rates, remaining at an historic 11-year low. 

"Nearly three-quarters of people who can work have jobs, with a particular rise in contractors, freelances and entrepreneurs.

"In fact, the number of contractors in the UK is up more than a third since 2008, due to many seeing self-employment as a viable opportunity."

Ms Sedgwick comments: "Most of those who are self-employed choose to be so, due to the freedom it provides and approximately one in seven people are self-employed in their main job.

"Although the prevalence of this varies across the country - for example, London has the highest proportion of people who are self-employed - this population has increased. Yet they are finding it more and more difficult to get a mortgage."

ONS statistics: growth in the number of self-employed workers in the UK

As Spicer Haart's Mr Phillips comments: "There is now a very big difference between how employed people are treated and how the self-employed are treated, which I do not feel is fully justified.

"Arguably, self-employed people will fight incredibly hard to keep their business going and pay their mortgage, whereas an employed person is at just as much risk of losing their income through redundancy."

Yet United Trust Bank's Mr Tolfree thinks things are starting to loosen up for self-employed applicants.

He says: "Over time, lenders, and especially specialist mortgage lenders, have begun to relax some of these restrictions and the mortgage market for self-employed customers is now wider and deeper - although not as broad as it is for employed applicants.

"There is certainly more choice now than there was directly after the credit crunch."

simoney.kyriakou@ft.com