How Easy is it to Get a Mortgage if you are Self-Employed?
The pandemic is making it harder for self-employed first-time buyers to secure a mortgage.
Self-Employment Most Common Reason for Mortgage Rejection
Self-employed workers are increasingly ubiquitous. From October-December 2019, more than 5 million workers in the UK identified as self-employed. This proportion represents 15.3% of the workforce; a 3.3% increase across the last 2 decades.
Yet, self-employed workers are those who struggle most when trying to secure a mortgage. Research from Aldermore Bank revealed that being self-employed is the principal reason why mortgage lenders reject prospective first-time buyers. The unwelcoming response from the banks has meant that nearly 25% of those surveyed have given up being self-employed in order to take a salaried position and increase their chances of securing a mortgage.
Scepticism for Self-Employed Workers
Earlier research suggests that before the pandemic, being self-employed was not such a risk factor when seeking to secure a mortgage. Yet, in the light of the Coronavirus pandemic, lenders have become increasingly wary when dealing with freelance employees.
The lenders blame their scepticism on the growing shift towards informal working arrangements, making it more difficult to ensure long-term financial stability. Self-employed individuals have historically found it more difficult to prove long-term employment. This has been worsened by the recent pandemic with many lenders forced to blindly forecast their future earnings.
Struggling to get mortgages from mainstream banks and lenders, the last decade has seen the rise of challenger banks and specialist finance companies to fill the gap that high street banks cannot fulfil. This includes using lenders such as Precise Mortgages, Masthaven, Lendvest and Magnet Capital.
Nationwide Caps Self-Employed Mortgage Range
In the latest bad news for the self-employed, Nationwide has reduced the maximum loan to value, bringing it down to 85%. This could make obtaining a mortgage more difficult for low equity buyers who are self-employed. However, this is not specific to Nationwide. Their recent reduction in loan to value is in line with other lenders in what they say is hopefully a temporary move.
Nationwide attributes this action to the increased demand generated by the stamp duty reduction. However, they claim that they are still committed to supporting first-time buyers and are currently the largest lender to still offer 90% mortgages to employed first-time buyers. They claim that the situation for lending to self-employed borrowers is more complex in times of uncertainty.
It is certainly a challenging time for self-employed borrowers to secure a mortgage; however, this does not mean it is impossible. If an individual is able to demonstrate a good credit history, past salary and offer a reasonable deposit size, they are more likely to be able to obtain a mortgage.
The better they are able to demonstrate their income and profits, the more credible they will seem to lenders. Experts recommend coming prepared with full credit history, tax declaration forms and an overview of your average profits over the last year.