The changing landscape for the self-employed
Craig McKinlay is new business director at Kensington Mortgages
A decade ago, 3.3 million UK individuals were classified as self-employed. That number topped five million last year – 15% of the workforce.
Greater control of hours, workspace flexibility (in normal circumstances), and a better work-life balance are some of the reasons why individuals make the change. While lender attitudes towards self-employed borrowing have moved on since 2001, a significant majority still struggle to get accepted for a mortgage today. If it were easy, these types of mortgages would be mainstream. The industry just isn’t quite there yet.
Pre-COVID, the appetite for self-employed lending was gaining momentum and there was plenty of choice for brokers and customers. Then the pandemic came – and the self-employed took a hit. A lot will have seen their income drop to zero for periods of the past year. Some may never recover. Whereas others will bounce back stronger than ever.
Self-employed workers have borne the brunt of the financial effects and a lack of income and irregular trading history – to name a few barriers – are some of the reasons why rejections may happen even more so now. High-street lenders are either pulling back product offerings, reducing LTIs, or increasing rates for self-employed borrowers. Many refuse to lend to those who have suffered a drop in revenues, whereas others are reticent about supporting those who have taken a bounce back loan – which is a great many people these days.
There is still a general misconception amongst lenders that self-employed borrowers are more ‘high-risk’. But the self-employed population is incredibly resilient – our research shows that a PAYE worker has only one months’ worth of cash reserves saved – whereas a self-employed individual has more than six. One-quarter of small businesses could also sustain themselves for nine months or more.
With change comes opportunity. The self-employed landscape is changing and COVID-19 has only expediated this. We’ve already seen applications from all walks of life – dog walkers, athletes, tattoo artists, taxi drivers to vloggers. There is also an increasing proportion of young adults with ‘side hustles’. They are not necessarily wanting a mortgage now – but there will be new professions applying in the future. Take online influencers, who have only risen to power over the last five years or so. What defines a ‘self-employed’ profession now may look completely different in ten or twenty years.
Lenders should use this time to take stock of what has happened, review their processes, and start thinking differently. A one-size-fits-all policy will not work for the self-employed.
At Kensington, we have the resource to look at every case individually. As long as that person in question was in a good place before COVID-19 struck, and is set up well to recover, then we will still try our best to help that borrower take the next step on the property ladder.
Criteria eligibility needs to change. If lenders stick with the traditional model of taking an average across the last two or three years, there is going to be a big blip – and that blip is going to unfairly disadvantage individuals who have taken the brave step to start their own business. Lenders will need to be far more flexible going forwards, more so than ever.
A few rocky months of trading does not mean that the business or its foundations are bad. Many self-employed individuals deserve a chance. Despite everything that has happened, it has not deterred many from giving up.