For the UK’s self-employed workers, attempts to secure finance via the high street can mean being confronted by strict eligibility rules and daunting application processes. Brokers can and should offer a better way forward: tailored guidance, along with the type of specialist mortgage and short-term finance offerings that reflect the circumstances of individual customers.
With this in mind, let’s take a closer look at self-employed borrowers, and at the categories of property finance solutions that are most likely to meet their needs.
Self-employed borrowers: a market that’s hard to ignore
Between 2001 and 2017, the number of self-employed workers in the UK increased from 3.3 million to 4.8 million. Far from being a niche market, they now make up around 15% of the workforce.
Traditionally, certain sectors (including construction and independent retail) have always been strongly associated with self-employment. These days, a much more diverse range of workers operating under short-term contracts and freelancing arrangements are boosting the ranks of the UK’s self-starters. More than 40% of participants in this so-called ‘gig economy’ are university educated — and 28% perform professional roles.
The demand for finance solutions geared towards the self-employed is on the rise. Failure to respond to it means missing out on an increasingly big and attractive chunk of the overall market. Diversity is on the rise, too. Alongside tradespeople and small business owners, don’t be surprised to see the likes of project managers, accountants and healthcare professionals (to name just a few), all seeking tailored, relevant advice. This is definitely worth bearing in mind when it comes to marketing messaging and promotions.
What are self-employed customers looking for?
The days of the ‘self-cert’ mortgage are, of course, long gone. The hard reality is that those customers who are able to demonstrate a secure, predictable income source will generally find it significantly easier to source finance options compared to many self-employed borrowers.
It’s hardly surprising that these customers often approach the loan application process with a downbeat attitude. By way of illustration, Aldermore Bank found that 30% of self-employed homeowners believe that lenders are ‘biased’ against them.
This opens up the first big opportunity for brokers; namely, it’s worth pointing out at an early stage that applying for a mortgage as a freelancer or small business owner is not a ‘lost cause’. It involves explaining that when it comes to understanding the circumstances of self-employed borrowers, some lenders are more accommodating than others — and that you are expertly placed to point them towards the most appropriate products.
The following points can also be especially relevant to finance applications for self-employed borrowers:
Accommodating the ‘side hustle’
For many customers, income generated from their own business might sit alongside salaried income. Examples include the customer who runs an e-commerce store in their spare time, or one who offers consultancy services separate from their day job. Depending on the amount they want to borrow, you may need the lender to take into account a mixed employed/self-employed income stream when assessing affordability. Be aware that some lenders are more amenable to this than others.
Accounts in support
When assessing affordability, the quality of paperwork in support of the application is crucial. It’s typical for lenders to require sight of two years’ profit & loss accounts for sole traders and partners. For company directors, it is always useful to have access to lenders who are able to make an assessment based on either a combination of dividend payments and net salary or a combination of director’s salary and operating profits.
The greater the degree of flexibility on the part of the lender (e.g. on the number of years’ accounts required – or on the way it regards year-on-year increases in profits), the greater the chances of application approval.
First Charge mortgages
To contractors and small business owners, high street lenders can often come across as unable or unwilling to accommodate their circumstances. Before approaching you, many such customers may have already hit a brick wall in their attempts to secure mortgage finance.
To be able to make a difference, it’s useful for brokers to have access to a range of specialist residential mortgages. Ideally, this will be from lenders who appreciate the realities of self-employment — and who are able to accommodate them.
What is the lender’s attitude to growth-stage businesses? Can they cast a sympathetic eye over business growth projections? Do they generally demonstrate a degree of understanding when it comes to realities such as month-by-month income volatility? These are the types of questions brokers should be asking when assessing whether a particular lender is a good fit for a self-employed customer.
Second Charge mortgages
A customer requires a cash injection, perhaps to invest in stock or equipment for their new business. To enable this, they want to unlock some of the equity in their residential property.
Remortgaging might seem the obvious solution — but there may be stumbling blocks in the way. Let’s say, for instance, that the customer is no longer in a salaried role (a significant material change compared to when the mortgage was first arranged). They are starting to see a profit from their new business, but turnover levels are volatile. Under these new circumstances, the existing lender may be unwilling to extend the terms of the existing loan.
A second charge might offer a practical alternative; in other words, a secondary secured loan (from a different lender) that sits on top of the existing loan. As with first charges, it’s useful to have access to specialist products from lenders who understand the needs of self-employed borrowers.
This category of loan is not just for bridging funding gaps in property purchase scenarios. Flexible and usually quick to arrange, these secured loans are particularly well-suited to meet the needs of self-employed borrowers in a wide range of situations.
Suppose a self-employed customer needs to invest in machinery in order to fulfil a contract, with the turnaround for the project (and payment) being 3-6 months. Where there is a definite exit strategy, i.e. where there is certainty on when your customer will be in a position to redeem the loan, don’t overlook the possibility of bridging finance as a practical fix.
With a wide range of contractor and small business-friendly products at your fingertips, it becomes so much easier to position your brokerage as a firm to turn to in this area. If you’re interested in learning more about how to make the most out of your property opportunities, head over to our blog or speak to Vantage today.
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