Exclusive: Kensington targets the self employed

Nia Williams

June 18, 2015

The mortgage, which will launch on Monday 22nd June, is available to sole company directors and their partners.

It is designed to reflect the true earnings of successful entrepreneurs who choose to keep some profit in their business rather than draw it all down as salary.

The move will help expand options for the UK’s estimated 4.5 million self-employed in a market which has struggled due to restrictions on lending to borrowers who are not in full-time employment.

Kensington’s own research among brokers shows 37% say self-employed borrowers struggle to prove their income compared with just 3% of employed customers.

It is common practice for many small business owners to take only the salary they need in order to be tax efficient. But while leaving profit in their business is a good way to strengthen the balance sheet of their company, it can also reduce their chance of getting a mortgage.

Most lenders will only consider salary and dividends when assessing the affordability of self-employed customers. Kensington claims to be the only lender that is able to consider both profits and salary based on a customer’s previous year’s accounts.

Keith Street, head of Kensington, said: “In 2009 Kensington launched an approach to self-employed lending based on reviewing the last 12 months accounts, which meant that entrepreneurs no longer had to wait for three years to get a mortgage.

“But we know that there is more we can do to help customers in this vital sector. We recognise that for many directors of small companies, salary and dividends on their own are not a true reflection of their income and affordability. Which is why we can now make affordability assessments taking into consideration a company director’s share of profits in addition to their salary.

“This is a significant step in the way we approach lending to the self-employed and it is just one of the ways that Kensington is reacting to the shifting employment trends amongst our customers to ensure we are able to make responsible decisions without penalising those customers who do not fit a standard mould.“

The product has gone down well within the mortgage industry. Aaron Strutt, product manager at Trinity Financial, said: “We speak to a lot of limited company directors who leave money in their business and there are only a handful of lenders willing to offer them a sufficiently large mortgage.

“Conventional underwriting often discriminates against borrowers who do not need to withdraw all of their potential income from their business by only accepting salary and dividends when assessing affordability.

“Any step towards a more tailored approach to mortgage underwriting for business owners and the self-employed is very welcome.”

Andrew Montlake, director at Coreco Mortgage Brokers, agreed: “It is refreshing to see lenders such as Kensington listening to the needs of self-employed clients, who have been somewhat underserved by lenders in recent years. Understanding the real issues self-employed borrowers face is important and this new policy is a real winner which should help a wide range of potential borrowers.”

David Hollingworth, associate director of communications at London & Country, was encouraged by the move: “Self-employed homeowners have been hit by tougher lending rules in recent years and can struggle to meet rigid income proof requirements. It’s therefore crucial that lenders continue to evolve their approach to provide more flexible solutions to self-employed borrowers.”

Ray Boulger, senior technical manager at John Charcol, agreed: “It is really encouraging to see we are at last getting a few criteria improvements in the market, especially for the type of borrower who has been disproportionately affected by tighter lending conditions and regulations over the past few years.

“This criteria enhancement will be warmly welcomed by brokers and their self-employed clients and should help some of the mortgage prisoners.

“Some may now even be able to think about moving home!”

How it works

This example is based on the assumption of a sole company director who chooses to take a salary of £10,000 (paid from the administrative expenses) and dividends of £40,000.

His company had a turnover of £150,000, administrative expenses of £35,000 and therefore an operating profit (before tax) of £115,000.

Tax on profit amounted to £21,000, with profit for the financial year totalling £94,000. With dividends paid of £40000, profit after dividends came to £54,000.

By considering profit as well as salary, Kensington would be able to base its affordability assessment on both the salary (£10,000) taken by the customer and the company profit (£94,000) for the financial year.

The income, therefore, that Kensington would use for affordability is £104,000.

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