Slightly more complicated for the self-employed to get a mortgage

There are many concerns in the current climates relating to job security and especially how lenders look at the self-employed following lockdown with regards to consistency of ongoing income and customer base.

The growth of self-employment, contracting and the gig economy has continued to challenge and change the make-up of the UK workforce over the past few years. Government statistics for 2019 saw the number of self-employed people rise to 4.93 million, some 125,000 more than a year earlier and this is a number which is only expected to grow.

As a specialist mortgage broker, we’re seeing a greater number of clients who are not only self-employed but who have a variety of income streams and different ways in which they generate their income. As the raising of the Stamp Duty threshold is set to encourage more first-time buyers into the housing market, and homemovers to take the next step up the property ladder, it’s vital that mortgage brokers are adept at meeting the ever-changing demands of such borrowers.

Moving forward, an even greater proportion of homebuyers will have a non-traditional income history and many differing forms of current income for lenders to contend with. Despite this sustained shift, it largely remains the case that those with a salaried or traditional source of income are far more likely to be eligible for mainstream mortgage deals than those with complex income scenarios. Having said that, there also remains a misconception that those missing out on the perceived favourable terms of high street lenders are unable to get a mortgage. Thankfully, there are a healthy number of lenders - some on the high street, many more not on the high street - who have competitive product ranges and flexible criteria in place which can service the needs of the self-employed workforce or those with multiple income streams. A large proportion of these products are available through specialist lenders and some can only be accessed via a mortgage broker.

It’s always been slightly more complicated for self-employed people to obtain a mortgage and – especially over the short-term - this may get even tougher when you consider additional Covid-19 complications. The rise of self-employment and the gig economy will undoubtedly continue. And with many underlying lending restrictions still in place, especially at higher loan-to-value levels, this really does magnify the importance of good, professional advice in helping self-employed clients and those with more complex incomes to achieve their homeownership goals. 

Lenders attitudes to risk and operational capacity affect higher LTVs

Loan-to-value (LTV) has always played a huge role in the mortgage market, although borrowers can often be unaware of the activity swings going on behind the lending scenes and the reasons for these.

Getting back to basics for a moment, LTV is essentially the size of mortgage that a lender is prepared to offer borrowers in relation to the value of the property they are looking to purchase or remortgage. It is expressed as a percentage. For example, if a lender offers a mortgage deal which has a maximum 80% LTV, it means they will lend up to 80% of the property value. And the borrower will need a minimum 20% equity if they are remortgaging or a 20% deposit for a purchase.

The well-publicised reintroduction of physical valuations offered a huge lift to the mortgage market generally. This was swiftly followed by a flood of lenders welcoming new business. After a cautious initial approach, LTV levels initially crept up, but the question is – did some lenders open the higher LTV door a little too soon? Were they surprised by the amount of pent-up demand or were they not quite in the right position to make such moves from a logistical and operational sense?

Only individual lenders can answer this question, although many 90% and some 95% LTV products have been launched and pulled in quick fashion as lenders appear to be struggling to service the influx of enquiries. Or lenders are simply offering them for a limited time through limited distribution channels to help control the supply and demand element.

Highlighting products being pulled from the market is certainly no criticism of these lenders. If service levels can’t be maintained, then this is clearly a sensible move to make. Managing risk and operational capacity has always been a challenge for lenders, and this is proving increasingly difficult in the midst of some uncertain economic conditions. This is reflected in product numbers. Recent data from Moneyfacts revealed that the number of products at 90% loan to value has shrunk to less than a tenth of the figure available pre-lockdown. The data outlined that there were 779 residential deals for borrowers with a 10 per cent deposit in March before social distancing rules came into force, shutting down the market. However, at the end of June, there were said to be just 72 products on offer at 90 per cent LTV, a drop of 91 per cent.

The higher LTV lending battle will be an ongoing theme throughout the rest of 2020, and this will be dictated by a number of issues from an internal and external perspective. There’s no getting away from the fact that borrowers are crying out for higher LTVs. However, there remain question marks over house prices, unemployment figures, not to mention if and when a recession may hit – and how long this may last. From a lending perspective, issues remain over attitudes to risk, operational capacity and servicing the valuation backlog and pipeline cases.

We also have to consider how this period is affecting new and existing borrowers. At Impact Specialist Finance, we’re seeing greater numbers of clients coming through our doors with some form of adverse credit, and this number is only likely to grow. When it comes to servicing these needs, fewer options are currently available. Many specialist lenders are tightening criteria and it’s difficult to know if, and when, the near prime product market will experience any significant improvement. Especially in the midst of lingering uncertainty around exactly how payment holidays will affect credit assessments.

These trends will prove interesting stories to follow as lenders continue to get to grips with demand and how best to service ever-changing borrowing circumstances amidst a variety of Covid-19 and wider economic repercussions. What we do know is that mortgage advisers will prove invaluable in quickly determining whether a case is viable or not and advice has never been more vital than it is today.