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Mortgage lenders penalise self-employed and business owners ‘on status’ regardless of re-payment track record

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Self-employed people can no longer borrow as much as full-time workers when they take out a mortgage with NatWest, it was reported by The Times.

The bank allows employed workers to borrow five times their salary, but has decided that self-employed workers can borrow only 4.5 times their income.

Rather than looking at the merits of the individual, such as their current state of affairs, or their re-payment track record, some banks since the start of the COVID pandemic, are making blanket decisions solely on a person’s status, employed v. self-employed.

The Time reports, pointed out that most lenders typically calculate the amount someone can borrow by multiplying their salaries by five (or more than five if they earn over £100,000 a year), but banks have become increasingly restrictive during the pandemic and self-employed workers often have tougher conditions to meet.

Chris Sykes, a mortgage consultant from Private Finance, said in the Times report: “I don’t think this is fair, especially where some businesses will have thrived through Covid.”

The Freelance Informer peaked at Natwest’s site and it clearly states: “The process of being accepted for a mortgage is more challenging for those who are self-employed but it’s certainly not impossible.” 

With mortgage lenders, such as Natwest, business owners and the self-employed will be required to submit two fully submitted tax assessments and their tax year overview. They should also be prepared to show income for the past three months from a bank statement, as lenders are assessing applicants during the March lockdown period and beyond to see if a company is profitable, if the business took out a bounce-back loan or if you took a holiday from paying credit cards or your current mortgage.

You also have to consider that lenders treat self-employed companies differently based on how they distribute their income, expenses and profits.

For example, if you form a limited company, you’ll be keeping your business accounts separate from your personal ones. As a director, you’ll usually pay yourself a salary and dividend payments, both of which lenders will take into account when you apply for a mortgage. According to Which? if you choose to retain profits in the business rather than drawing them out, this can create difficulties, as some lenders don’t factor retained profits into their calculations.

SEIS- it could bite you back

West Brom for Intermediaries, for example, will not accept applicants from self-employed borrowers receiving money from the government’s self-employed income support scheme, according to a Mortgage Strategy report.

The lender also requires borrowers that have taken a bounce-back loan to include the commitment in their application even though it is interest-free for the first year.

Sykes, who was quoted in a separate Mortgage Strategy report, said: “We believe lenders need to adapt quickly to these changing times. Those who remain static will lose incredibly valuable customers like company directors and business owners going forward.”

If you have a lender in mind, it might not hurt to read some reviews of them first. Which? has recently conducted a survey of borrower sentiment about many lenders here.

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