Could your bounce back loan or grant cost you a mortgage? Self-employed grilled over Covid cash they thought wouldn’t blemish their record
Since the start of the pandemic, millions of self-employed people have accessed government support schemes such as the Self-Employment Income Support Scheme grant and Bounce Back Loan.
The money allowed them to keep afloat in the most difficult days of the pandemic – and they were told that it would not blemish their credit scores.
But despite the grants and loans not being marked against them officially, it appears they are still causing problems for some when it comes to applying for a mortgage.
Half of self-employed people are worried they won’t be treated fairly when it comes to mortgage applications, according to new research
Two in five people who accessed the SEISS grant during the pandemic fear that they could be penalized in a mortgage application, while half fear they won’t be treated fairly, according to research from the Association of Independent Professionals and the Self-Employed,
The research also found that only one in 10 self-employed workers were planning to purchase a property in the next five years.
And The Mortgage Lender, which specialises in mortgages for self-employed people, says that group are the most likely to have experienced job volatility. It said that more than a quarter of self-employed people have seen their employment status change during the pandemic.
When Covid first hit, some lenders took the decision to reject all applicants who were self-employed.
While many have since softened that particular policy, there is evidence that self-employed mortgage applicants are now being penalised for taking advantage of government support schemes.
Those who applied for a Self-Employment Income Support Scheme grant for themselves, or a Bounce Back Loan for their business, were assured at the time that it would not affect their credit record.
While that is technically true, mortgage lenders are asking self-employed borrowers whether they took advantage of these schemes, and how much they borrowed.
Some mortgage lenders are asking self-employed borrowers about Covid grants and loans
Lenders can also see the loan payments going out when they request personal or business bank statements.
As our case study (see below) shows, some lenders are deducting the SEISS grant from borrowers’ income for the 2020/21 tax year.
This reduces the size of the mortgage they can qualify for – and sometimes whether they can pass the affordability checks at all.
Peter Beaumont, chief executive of The Mortgage Lender, says that mortgage brokers and self-employed applicants have told him of their struggles when seeking a mortgage or remortgage.
‘If you have a bounce-back loan, most high-street lenders will either say no to you, or they will want the bounce-back loan repaid in full before they will consider lending to you,’ he said.
‘Others will use it to reduce the amount you can borrow.’
Beaumont added: ‘We’re now seeing suppressed income from the pandemic coming through in people’s books, and also their bounce-back loans – it is a double whammy.
‘There is a very strict assessment of income for self-employed people.’
Beaumont called for Covid support loans to be excluded from affordability assessments, in the same way that student loans are.
This is Money asked five of the high street’s biggest lenders for their policies on lending to self-employed people (see below).
While most said they did not explicitly exclude those who had taken government support, many said that extra affordability checks would be put in place for the self-employed.
Santander, for example, said it would reject applications if a bounce-back loan had been received in the three months prior.
Nationwide and Santander are also requiring higher deposits than for salaried borrowers, at 15 per cent and 25 per cent respectively.
Beaumont says his company is offering more flexible terms for self-employed borrowers, and he is calling for other lenders to do the same.
‘It’s extremely important that the lending market reacts to the trends in UK employment, particularly by considering more complex financial situations,’ he said.
‘We weren’t warned about grant repercussions – I was fuming’
Katy Croft and her partner outside their new home. They struggled to get a mortgage, despite having more than £540,000 in equity, as they had taken Covid grants
Katy Croft, a freelance property consultant, told This is Money she was initially rejected for a mortgage, despite having a deposit of more than £540,000, as she her and her partner took £13,000 in SEISS grants.
I took out an interest-only mortgage when I purchased a house in Thames Ditton seven years ago.
After five years, I decided I wanted to sell that house and port the mortgage onto a new property that I wanted to buy jointly with my new partner in Hersham.
In the meantime we started renting a property together, paying £2,500 per month.
Once we had sold our houses, we found a new place to buy. The purchase price of the house was £725,000, and due to the sales of our respective homes we had £540,000 in equity. We asked to borrow £220k to enable us to fund some work on the new home.
My partner and I both have successful businesses – he runs a property maintenance and decorating business and I am a freelance property consultant. Both businesses have produced an income of roughly £40,000 per year each over the last three years.
It took months to get the mortgage through and we only got it because I battled persistently
It was all going smoothly based on our last three years’ business accounts, until the bank asked us if we had taken the Covid self employed grant.
I confirmed that yes, we had each taken two payments of £7,000 and £6,400, as we had been unable to work during the enforced lockdowns
The bank said that the grant would be deducted from our last year’s income, reducing our incomes by £13,000 each. They said this meant we ‘couldn’t afford to have a mortgage’.
I was fuming. At no point had anyone warned us that we would be penalised for taking the Covid grant.
We were asking the bank – a major high-street lender – to lend us £220,000 on a house valued at £725,000, with a substantial deposit of £540,000, so the loan-to-value ratio was really low.
Based on the low interest rate we were being offered, the monthly repayments were going to be £345 per month, and we were currently paying £2,500 per month in rent. It was absolutely ludicrous.
I was determined not to be beaten. I insisted that we could afford it, and that we would just need to find a way to make them accept that we could.
We then started three months of negotiations. Luckily, I had a mortgage consultant who could see my point and helped as much as he could.
When we finally got the underwriting stage, I got a phone call from the bank to say our offer had been declined.
But I wasn’t taking no for an answer – I went back to our mortgage consultant and he started an appeal.
Then 24 hours later he rang back to say ‘Good news – I’ve finally got you your mortgage’. At that point I literally burst into tears – I was so relieved.
But it took months to get the mortgage through and we only got it because I battled persistently.
The most frustrating bit was the fact we weren’t warned that there would be any consequences or repercussions to taking the SEISS grant. It was a very painful lesson learnt!
One example of this is that The Mortgage Lender allows self-employed borrowers to exclude their earnings from 2020-21 tax year, roughly covering the first year of the pandemic, when submitting evidence for their mortgage application.
This could allow them to demonstrate a higher net profit than they would otherwise have been able to, as it reflects normal trading conditions.
However, specialist lenders usually charge higher rates than high street banks, as self-employed borrowers are a bigger risk than ones with a regular salary.
‘Self-employed people should be aware they’ve probably got to save for a larger deposit. We will lend to them, but rates aren’t as cheap as the high street – there is a premium for the slightly higher risk,’ he says.
Smaller, specialist lenders may be more amenable – but they do usually charge higher rates
Satnam Sidhu is a mortgage expert at broker Haysto, which also specialises in advising self-employed people and those with imperfect credit files.
‘We’re seeing more self-employed people struggling to get a mortgage after making use of government grants such as SEISS, bounceback loans, and business rate reductions – grants that were there to help them during a time of real uncertainty,’ he says.
‘Coupled with post-Covid issues such as mixed-up income, low trends of profits compared to previous years, and questions around the sustainability of businesses in industries such as hospitality, travel, and beauty, hard-working people are being let down at an already difficult time.’
‘The majority of our customers don’t fit high street lenders’ criteria, so we work with them to find mortgages with specialist lenders.
‘These are generally better-equipped to deal with the nuances that come with self-employed applicants.’
What are the big banks’ policies?
This is Money asked the UK’s largest mortgage lenders what their policies were on lending mortgages to the self-employed.
These were their responses:
Barclays
Maximum loan-to-value: 95 per cent (same as salaried applicants)
Can they exclude 2021/21 accounts? No
Lend to SEISS grant recipients? Yes. ‘We will assess these on a case-by-case basis and look at the sustainability of the income going forward.’
Lend to BBL borrowers? Yes. ‘All financial commitments, including loans, are considered when assessing the amount we can lend.’
NatWest and RBS
Maximum loan-to-value: 95 per cent purchases, 90 per cent remortgage (the same as salaried applicants)
Can they exclude 2021/21 accounts? No
Lend to SEISS grant recipients? Yes – as long as the grant was not received in the three months prior to the application
Lend to BBL borrowers? Yes, but they will seek to ‘validate a sustainable level of income’ and ‘understand what impact if any the bounce back loan has had on the customer’s income.’
Maximum LTV: 75 per cent
Can they exclude 2021/21 accounts? No. However, if a business has been impacted by Covid, Santander will look at their last three years’ trading statements, including 2020-21, as opposed to the usual two.
Lend to SEISS grant recipients? Yes – as long as the grant was not received in the three months prior to the application
Lend to BBL borrowers? Yes – as long as the loan was not received in the three months prior to the application. Santander says it will ‘Take account of the applicant’s entire financial position, including any payments due – for example towards a bounce back loan – to ensure that any lending is affordable.’
Extra requirements: Santander will also ask for the last three months’ business bank statements to show recent activity.
It will ask for details of how the business was impacted by Covid, including dates it was unable to trade and the dates and amounts of the government grants received.
Nationwide
Maximum LTV: 85 per cent
Can they exclude 2020/21 accounts? No. ‘We use the lower of the most recent year’s figure or the average of the last 2 year’s figures in our affordability assessment,’ says Nationwide.
Lend to SEISS grant or BBL loan recipients? Nationwide says: ‘The presence of a Covid-related Government loan/grant on its own would not be a reason to decline a mortgage application.
‘However, where an applicant is reliant on a Government loan/grant, then we would need to consider the impact of this on the long-term affordability position.’
Lloyds and Halifax
Maximum LTV: 90 per cent, or 95 per cent for Mortgage Guarantee Scheme customers
Can they exclude 2020/21 accounts? No – unless they have experienced HMRC processing delays.
Lend to SEISS grant recipients? Lloyds and Halifax will accept SEISS as allowable income. However if this increases income above levels seen in the previous pre-Covid years, they will take the previous years. If the total income including SEISS is lower than previous years, they then we will take the figure including SEISS.
Lend to BBL borrowers? Yes. They will only consider it in the affordability calculation if the customers declare it as a personal commitment on their application.
How to get mortgage-ready
Satnam Sidhu, mortgage expert at Haysto, offers his advice on how self-employed people can prepare themselves, and their finances, ahead of a mortgage application.
It can be more difficult for sole traders or company directors to get a mortgage, but there are steps they can take to make sure they are fully prepared
- Check that both personal and business bank statements look healthyThe majority of mortgage lenders are now asking to see business bank statements that show proof of a regular income. They want to know if an applicant’s revenue is sustainable and a true reflection of what’s showing on their self-employed income documents.
- Have the right documents The ones that might be needed are:
Self-employed sole traders: Tax summary computations/SA302
Limited company directors: Tax summary computations/SA302, business company accounts and bank statements
The majority of high street mortgage lenders will need an average of two years’ accounts, but some specialist lenders can work with just the latest year.
- Make sure you have the required deposit How much really will depend on which lender you approach. Five per cent deposits are generally available again for the self-employed with specialist lenders, but some high street lenders such as Santander still request a 25 per cent deposit.
- Improve your credit score as far as possibleThis might involve:
- Setting up a direct debit for bills and paying them on time
- Checking your credit report and correcting any errors
- Reducing credit utilisation (the ratio of credit available compared to what is being used)
- Paying down balances every month (providing proof that you can take on credit and clear it)
- Getting on the electoral roll (lenders mark an applicant down if they can’t find them based on their address)
Article sourced from What Mortgage on 7th February 2022. Original full article can be viewed by clicking link below
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Mc Daid Mortgages do not accept responsibility for any advice provided or opinions expressed with this article. This is for information purposes only
Your home may be repossessed if you do not keep up repayments on your mortgage
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