Rethink on risk needed as self-employed mortgage affordability drops 

According to the latest Mortgage Broker Tools (MBT) affordability index, affordability for self-employed clients has dropped to its lowest level since the index began in 2020.

At the end of 2022, only 65 per cent of self-employed mortgage enquiries were considered affordable.

I am sure there have been instances where an employee of a company can obtain a mortgage easier than the owner Christopher Hall, Mortgage Guardian

By comparison, affordability for non-self-employed borrowers sat at 77 per cent in December 2022.

MBT noted that affordability is being squeezed across the entire market, with affordability down from a peak of 80 per cent in January 2021.

Across the market as a whole 71 per cent of enquiries fell within affordability criteria in November 2022, the most recent month of available data.

MBT chief executive, Tanya Toumadj said this is unsurprising with rising rates and increased living costs but added that self-employed borrowers are worse impacted.

“In this environment, brokers can’t take affordability for granted and researching the best options for customers to achieve their desired loan sizes is more important than ever before,” Toumadj said.

Change needed

According to some brokers, the self-employed are being unfairly treated.

Mortgage for Actors founder, Austyn Johnson said in reality, PAYE workers should be viewed as riskier than self-employed people.

“Can a self-employed person get fired for something the day after they get a mortgage? 

“Can a PAYE person who has been laid off jump straight onto a new contract and diversify the very next day?,” Johnson asked.

In his view, lenders need to be willing to deal with a slightly larger workload when it comes to applications from self-employed people. 

“If they took the time to review a year of bank statements rather than three months, they would see the full income of a self-employed person,” Johnson said.

He pointed out that in the acting industry, actors typically get paid more around the Christmas period and then have a quieter period.

“If they apply for a house in June, they get declined if they are on a quieter month. Lenders like PAYE as it shows income monthly and makes underwriting easy. All a lender would need to do is accept one year's bank statements.”

Other mortgage brokers described the approach taken by lenders to self-employed borrowers as an “absurdity”.

Mortgage Guardian director, Christopher Hall said: “I am sure there have been instances where an employee of a company can obtain a mortgage easier than the owner, due to self-employed lending criteria. 

“That's the absurdity of lending today. It is no secret that a large proportion of lending decisions are based on default statistics and automated processes, hence a preference for low-risk lending propositions.

“Unfortunately, the self-employed are historically seen as higher risk.”

In Hall’s view, there are steps lenders could take to make it easier for self-employed people to access mortgages and a move away from a “one-size-fits-all filtering system” would be a good first step. 

He added however that he does not “envy the task of separating the wheat from the chaff.”

jane.matthews@ft.com