Self-employed workers face stricter mortgage checks: how to improve your chances

Mortgage lenders are adopting stricter criteria for self-employed workers, thanks to the pandemic.

Natwest won't accept applications from people who took income support grants from the government and other lenders are tightening the purse strings on the amount they will let self-employed workers borrow.

Now, a third of self-employed renters don't believe they'll ever be able to buy their own home, according to research from Aldermore Bank.

Here, Which? explains the challenges facing self-employed borrowers and offers advice on how to boost your chances of getting a home loan.

Self-employed workers pessimistic about mortgage chances

A new report by Aldermore has shown how the challenges faced by self-employed workers have been worsened by Covid-19.

More than a quarter of self-employed people (28%) told Aldermore that saving a deposit had become more difficult due to the pandemic, while one in five (18%) said they'd been forced to delay their plans to buy a home.

The biggest issues were around getting accepted for a mortgage. 64% of respondents said they believed banks treat self-employed people worse than those in salaried employment, while 32% said they'd been rejected simply for being self-employed.

Jon Cooper of Aldermore says: 'It is disappointing to see persistent barriers for self-employed people looking to secure a mortgage, which appear to have been exacerbated by the pandemic.

'Self-employed workers with seasonal or variable income streams may not fit the tick-box approach of many high-street lenders, but specialist lenders can dig into the detail to ensure they have opportunities to get on to the housing ladder'.

• Find out more:self-employed mortgage basics

Has it become harder to get a self-employed mortgage?

Getting a mortgage as a self-employed worker has always been more complicated, but the pandemic has added greater uncertainty, with banks reluctant to take on what they perceive to be 'riskier' lending.

Lenders are adopting stricter criteria than before. Natwest won't accept applications from people who took income support grants from the government, while HSBC and Yorkshire Building Society require evidence that the company has recovered from the pandemic.

TSB, meanwhile, will only allow self-employed people to borrow 4.25 times their annual income, compared to 4.75 times for non-self-employed workers earning over £40,000.

Other lenders are asking for bigger deposits. Santander is only offering self-employed mortgages at up to 75% loan-to-value (LTV), Metro Bank has set an 80% limit for those who've taken income support grants, and Nationwide will only lend at up to 85%.

• Find out more:how to boost your mortgage chances

Will things get better for self-employed borrowers?

This might paint a bleak picture for self-employed borrowers, but there are some glimmers of hope.

Santander requires bigger deposits than before, but it has taken the lead in allowing applicants to disregard their accounts from the 2020/21 tax year. Natwest, meanwhile, has announced it will launch new self-employed criteria next week.

The situation is ever-changing at the moment, resulting in wildly differing criteria and a risk-averse approach from lenders, but if the economy recovers well from the pandemic, banks may begin to loosen the purse strings.

In the meantime, self-employed applicants may have greater joy considering building societies and specialist lenders, who may assess applications on a case-by-case basis rather than using blanket eligibility criteria.

Tips on getting a mortgage when self-employed

1. Take advice from a mortgage broker: Whether you're buying a home or remortgaging, professional advice is vital in being able to navigate the mortgage market. A mortgage broker will be able to assess your financial circumstances and analyse which lender will be most likely to offer you a deal. This can save time and prevent failed applications, which can have an adverse effect on your credit report.
2. Use an accountant:Banks are asking for more evidence than before, so it's important that your numbers add up. Some lenders will only accept applications if your accounts are signed off by a certified or chartered accountant. One word of warning - it's common for accountants to legally minimise your declared income so you'll pay less tax, but a lower profit could affect how much you can borrow when applying for a mortgage.
3. Get your paperwork in order:Lenders will usually require three years of accounts. Accountants will usually provide your annual tax calculation (the SA302 form) as evidence. If you file your taxes online, you can access this form by logging into your account. If you file by post, you'll need to contact HMRC. Make sure you have these documents before applying.
4. Ensure your credit report is up to the mark: Before applying for a mortgage, ensure everything is correct on your credit report. For example, are you on the electoral roll at your current address? There are lots of steps you can take to boost your credit file, including paying off outstanding debts and closing dormant accounts. Be careful about your spending habits in the year before applying for a mortgage, as lenders are more likely to take this into account.
5. Save a bigger deposit: It's a difficult market, and the bigger your deposit, the easier you'll find it to get a mortgage. As we mentioned earlier, you may need to save a 15% or 20% deposit, and if you haven't been self-employed for long or the pandemic has significantly affected your income, you may need a bigger down-payment.