Lenders treatment of self-employed borrowers
Rory Joseph is director and Sebastian Murphy is head of mortgage finance at JLM Mortgage Services.
Last month we focused on the pretty significant issue of how a large number of lenders were treating self-employed borrowers – to say there is a two-tier approach would be something of an understatement and, a month on, we wish we could say expressing this view has resulted in a significant u-turn from all concerned.
Instead, some lenders are doubling down, cutting maximum LTVs further, heightening affordability requirements, treating self-employed borrowers like lepers and generally acting like we are back slap bang within the all-encompassing fire that was the Credit Crunch.
Now, you might think it odd to hark back to the events of 12 years ago, but there are lots of references being made to 2008/9 and the Credit Crunch in terms of justifying the current approach.
Of course there was plenty of really poor lending in the lead up to the crunch, however is it right that some lenders are treating the self-employed now as they might have done in its immediate aftermath, without actually realising that this sector is very different now?
For instance, and most obviously, there are simply more self-employed people than there were back then, and whereas over a decade ago, we would primarily be dealing with tradespeople when it came to this clientele, now we are talking about contractors, IT specialists, doctors, accountants, law firm partners, owners of limited companies.
The nature of being ‘self-employed’ has shifted and yet many lenders’ approach to these customers has not. You cannot treat every self-employed borrower as if they were working as (no disrespect at all) a beauty therapist, because the vast majority are active in these other sectors and, for many, the income impact of COVID-19 has not just been negligible, but positive.
We’ve had clients who have come to us, and since Lockdown one, have earned more money each month than ever before, and yet we have lenders wanting to know what they earned during lockdown, or making a judgement call on affordability based on business accounts which are not up to date. Rather than focusing on the last three months, they focus on an arbitrary three months when the individual’s income looks nothing like it does now.
What is even more frightening is that some lenders appear to be comparing self-certification mortgage customers from 2008 to self-employed clients now. We all know that most self-employed customers have almost had to crawl over glass to obtain competitive mortgages in the last 10 years, therefore have proved themselves perhaps more that any PAYE applicant would ever need to.
It’s of course, important to keep banging this particular drum, and in that sense, perhaps the big question is whether this type of lending approach is here for the long-term or will we see a shift sooner rather than later? Will lenders bow to industry pressure over the next couple of months? Probably not, but next year is perhaps a different matter altogether.
Because, when it comes to 2021, we think there may be some cause for optimism, not least because of recent wider news in terms of COVID-19 vaccines, and whether this current horrendous period of lockdowns, etc, might finally come to an end over the months ahead, but also because of closer to home concerns, not least house price sustainability, a return to ‘normal’ work practices, and indeed the targets lenders will set themselves for 2021.
That latter point might actually loom large in any shift in lending focus, not just in an area like lending to the self-employed, but also in other key sectors, perhaps most notably, high LTV lending. Because, from what we gather, even with these various lockdown periods, many lenders are still going to hit their lending targets over the course of 2020, and that means it’s highly unlikely those targets will be dropped/maintained for next year; in fact they are likely to be raised.
The question will then need to be asked, can we hit those increased targets with the same cautious approach? Some will think, yes they can. Others will recognise that there’ll need to be some movement back to pre-lockdown criteria and assessment in order to do so, and it’s at this point, that we hope to see lenders actually recognising that this is not 2008. Far from it. And that operationally they can cope, and that many borrowers – self-employed particularly – are very good credit risks.
As we keep hearing over recent days with regards to a vaccine, it will take us some time to get there, but we have to be optimistic that this approach won’t need to be sustained for the long-term. That we can inch back up those risk curves, helping quality borrowers secure the mortgage finance they need, and not be frightened to death that lending to a self-employed borrower at anything but the lowest LTVs is somehow irresponsible. In that regard, and in so many others, roll on 2021.