Being your own boss needn’t make it hard to get a mortgage
By Karen Smith, Sales Manager at Newbury Building Society
After twenty years of growth, there was a sharp decline in self-employment levels in the UK during the COVID-19 pandemic. According to the Office for National Statistics (ONS), levels of people in self-employment started to recover in the first quarter of 2022, increasing to 4.2m.
Some lenders have very rigid policies when it comes to self-employed mortgage cases, and the pandemic made it even more difficult for those working for themselves to secure the best mortgage for their circumstances. However, at Newbury Building Society, we believe in openness and flexibility.
We don’t credit score, all of our mortgages are individually underwritten, and we consider unusual properties and circumstances which may be less desirable to other lenders. With self-employed cases, we can consider net profit on an individual basis. For us, it’s all about understanding the business and the individual demonstrating affordability into the future.
What about clients who have become self-employed very recently?
The first step is to analyse the bigger picture. We ask for 3-year employment history, proof the client has related experience in the stated profession, and confirmation that income is at a similar level to previous earnings. We can also consider one year’s business accounts and in some cases, less than that.
What’s Newbury’s approach to contractors like?
We categorise contractors in a similar way. The core principles are the same; however, providing the applicant has at least 2 years’ experience in their field, we can consider day-one contractors. A minimum of 3 months remaining on their contract at application is needed and we base the income for affordability on their daily contract rate.
We assume a five-day working week and a 48 working year (to pre-empt holidays and time off). It is common to use a limited company when contracting; however, we don’t use limited company accounts.
How do you approach a reduction or fluctuation in income?
We aim to understand each business holistically and analyse activities over 3 years. Each business is different, and as long as we can understand the position it is in, we can effectively take a view of any large positive and negative variances.
As ‘open banking’ becomes more prevalent, would you consider basing affordability for self-employed clients on net disposable income?
Currently, we don’t have any plans to do this. When calculating affordability, we can consider using undrawn net profit, adjust for lower tax on dividends, and allow certain costs to be added back in.
Building societies can be held back by the regulators from offering much by way of fixed rates. Would you like to see relaxation of the rules surrounding who can and cannot offer fixed rates as ‘standard’?
Our funding model is different to that of a bank. We fund the majority of our lending from our savings members and fixed-rate mortgages are hedged to protect those savers. It is because of this that we are unable to conduct all of our lending on a fixed-rate basis. Nevertheless, we have increased our fixed rate allowances in recent years, and this has allowed us to provide a wider range of products.
As the changing interest rate environment intensifies, we are seeing more clients considering a variable rate than available fixes at a higher rate. In some cases, there can be as much as a 3% difference between the two products. As self-employed income can vary month on month, a lower discounted rate may be attractive.
How do you view the government’s COVID-19 support grants?
The pandemic tested so many sectors, and underwriting is no different. No two cases are the same, so it is really unfair to apply a one-size-fits-all policy. We don’t discriminate where government grants have been taken – we are more interested in how the business performed before and after the grants as opposed to throughout the pandemic itself.
What about CIS Workers?
If they have a history of CIS working, we will look at the gross position on the CIS vouchers instead of annual net profit. We assume a 48-week working period providing the figures are fairly consistent week-on-week.
Do you take dividends or net profit?
We take whatever the best position is for the client. Our usual approach is to take net profit plus directors’ remuneration for the year, as this also allows for retained profit to be used for affordability if a full entitlement of dividends is not being taken.
What if a company has recently incorporated?
That’s fine, we would look at the previous income of the sole trader or partnership and take a view.
- We have an instant chat service for brokers
- Our underwriting is tailored, and all cases are individually considered
- We have a dedicated BDM to help you on an individual basis
- We don’t credit score.
To find out more, or speak with one of the team, visit our website: www.newbury.co.uk/intermediaries/.
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