What can brokers and lenders do to ensure that self-employed are treated fairly when applying for a mortgage?
Head of Lender Relationships Danny Belton shares his thoughts on how adopting a pragmatic approach can help self-employed borrowers.
Throughout the COVID-19 pandemic, the fortunes of the self employed have varied somewhat significantly. While there are some business and sectors, such as travel and hospitality, that have been particularly badly hit, there are some businesses (and business owners) that have seen huge success. There are also those that have managed to return to regular levels of work and income. But how can we ensure that we’re treating the self employed fairly when considering their mortgage applications and affordability given the turbulence of the last 15 months?
How brokers and lenders can help
There are things that both brokers and lenders can do to make sure self-employed borrowers are treated fairly when applying for a mortgage – and it starts with giving more context to your client’s situation.
The pandemic brought out-of-the-ordinary fluctuations in income. As a result, brokers and lenders now need to look at the broader, contextual circumstances when considering a self-employed person’s mortgage application, and take a much more pragmatic approach.
It’s also important that underwriters are given appropriate and relevant facts and figures to be able to take this pragmatic view while assessing affordability. What might have been interesting but insignificant background info before the pandemic, might just prove crucial information in understanding a self-employed borrowers risk appetite and profile, and ultimately secure them the funds they require.
Is government support a help, or hindrance?
Relying on financial support from government shouldn’t be seen as a bad thing. The majority of lenders don’t see any issues with government support. The same goes for payment holidays.
These financial support packages won’t pose an issue for lenders if the client has returned to normal, regular repayments following the payment holiday. And bounce back loans may even improve the chances of a business returning to successful levels of trade in the future – perhaps even more so than before. However, these loans and the associated repayments obviously need to be taken into consideration when calculating affordability.
Lenders are now also providing more proactive support to help brokers in certain cases. Clear communication between broker and client, and broker and lender is paramount.
Delve deeper for a more pragmatic approach
Traditionally, lenders would simply look at the year’s accounts to judge how much a self-employed person is able to borrow. But given that the accounts of the last year may not truly reflect the actual strength of a business, many lenders are now looking at the last 3 months bank statements too, in order to create a more accurate view. This allows them to see if the business is back to generating regular and steady levels of income. The change creates the question that perhaps now is the right time to take a closer look at how we assess the affordability of the self-employed for good? At the end of the day, a lot of these applicants can afford the loans they’re looking for, but how can they effectively prove that they can?
While 2020/21 accounts can’t be completely disregarded, acting pragmatically is allowing lenders to make decisions based on the bigger picture having been provided with a little more context. Asking ‘why is the applicant in the position that they're in?’ is a great place to start.
Find a smarter fit
Of course, it’s important that the lender is comfortable with your client’s application and situation. Above all, it is down to you as a broker to ensure that the lender is the best fit for your client’s needs, too.
SmartFit from Legal & General can help. SmartFit is Legal & General’s Mortgage Club’s latest innovation. It combines our mortgage search criteria tool with an affordability calculator, to help you find an even smarter fit between your clients and lenders.