Self-employed lending criteria: Why has it tightened and can specialist finance help?

The self-employed are facing a difficult time in the property market, with self-employed lending criteria tightening in the mainstream. Those working for themselves were hit particularly hard by the pandemic, and we’re starting to get an idea of how long-term plans will be affected.

Arguably, gaps in Covid-19 support, coupled with shifting freelancing legislation, led to a mass exodus of talent. There were around 5 million self-employed workers in Q4 2019. By Q3 2022, this dropped to 4.3 million.

For those remaining, homeownership is becoming out of reach. Only 65% of self-employed mortgage enquiries were considered “affordable” by the end of 2022, according to the latest Mortgage Broker Tools (MBT) affordability index. The lowest level seen since the index began in 2020.

Mortgage advisors and brokers have called for an easing of affordability criteria. But we’re unlikely to see this emerge on the high street. As the economy struggled, mainstream banks tightened their assessments.

As a result, mortgage approvals plummeted. It appears only those with optimised incomes are getting anywhere at the moment. But, there are alternatives to high street lending: specialist finance options could offer reprieve.

Source: IPSE, FT Advisor, Yahoo Finance

Why is self-employed lending criteria so rigid and understanding the role of specialist finance

The specialist finance market went from strength to strength in recent years. Between Q1 and Q3 2022, bridging completions rose from £1.04bn, to over £1.4bn. Applications also reached £7.9bn, and the size of loan books reached a record high of over £6.1bn. More recently, loan books continued to grow to record levels in Q2 2024, reaching nearly £8.4bn.

And as our industry expanded, it became clear to see where there were gaps. A recent survey of brokers highlighted how the specialist market fared in 2022. Along with what opportunities could emerge in the months ahead.

Some 91% of brokers agreed mainstream lenders had tightened their criteria for the self-employed. Also, 88% found that self-employed workers who took covid-19 grants were being marginalised.

To make sense of these self-employed lending criteria issues, we reached out to the Association of Independent Professionals and the Self-Employed (IPSE). Fred Hick, senior policy and communications advisor for IPSE, broke down the difficulties.

“The self-employed can often feel misunderstood by lenders, facing more hurdles than employees when trying to get a mortgage, including higher rates, higher deposits, and more paperwork,” he said.

“IPSE research from 2021, conducted with specialist mortgage broker CMME, found that one in four self-employed professionals have had trouble getting a mortgage, primarily due to requirements to provide more paperwork because of their employment status.

“We also heard that some lenders have even refused to consider applications from prospective borrowers due to them being self-employed.”

Fortunately, the potential of our market is coming to the forefront. When questioned on which niches, within specialist lending, they thought would grow in the near future, 52% of brokers said they expected growth from the self-employed sector. Self-employed lending criteria is likely to be eased in the bridging industry when compared to the high street.

Mr Hicks commented on this promising outlook: “Signs that brokers expect growth in the self-employed market is positive; but achieving this will require a more tailored approach from lenders and working to understand how self-employed enterprises operate, helping to de-risk them as potential borrowers.”

We know all about tailored approaches

Here at Market Financial Solutions, we understand the importance of this. We’ve been providing “tailored” approaches since our founding in 2006. We know that no two cases will ever be the same. Nor do we expect them to be.

Self-employed “enterprises” come in all shapes and sizes. We believe there is no such thing as a singular self-employed lending criteria assessment. A plumber’s day-to-day operations will look very different to that of an IFAs. Your background will be incorporated into a much bigger picture.

We’ll review your chosen field alongside the asset you’re investing into, the strength of your exit strategy, and what’s going on in the wider market.

Each case we handle is assessed on its own merits. We provide a bespoke service across our products – from auction finance through to buy-to-let mortgages. We’re happy to hear from property investors from a range of backgrounds. Be they individuals, foreign nationals, or the self-employed.

If you work for yourself and are worried about how your livelihood will be viewed by a nervous high street, we may be able to help. We understand your income record may be sporadic. What’s more, we’re under no illusions of the type of pressure your business faced in recent years.

Even those with the most stable of jobs, in the safest of industries, struggled to keep their heads above water during the lockdown years. Let alone freelancers, contractors, or independent workers.

If you pushed through the chaos and made it out at the other end, we think it’s unfair that your reward is being shut off from mainstream lending sources. Self-employed lending criteria may be tightening on the high street, but that doesn’t have to mean you’re left with no options.

Our doors are open. We have never stopped lending to those with complicated backgrounds and we have no plans to change that. We want to hear from you, even if you have defaults, liabilities, or missed payments on your record.

Source: Financial Reporter, Bridging Loan Directory, impact Specialist Finance, BDLA