Why are some lenders treating the self-employed as second-class citizens?
Rory Joseph is director and Sebastian Murphy is head of mortgage finance at JLM Mortgage Services
There is a lot of talk about ‘tiers’ at the moment with many people attempting to get their heads around where their own region sits in the government’s local tiering system.
We won’t make the obvious joke about this all ending in ‘tiers/tears’, although we just did, but it’s not only the government who are placing individuals into various tiers at the moment, with a number of lenders opting to run a two-tier system for their borrowers, with self-employed individuals (and their mortgage advisers) who are most definitely feeling the pressure at the bottom of that hierarchy.
Spend any period of time in this profession and you get used to the vagaries and whims that are often displayed by certain lenders.
It’s part of the ‘game’.
However, the unfair and draconian underwriting that we’re seeing at the moment in relation to some self-employed borrowers is, quite frankly, off the scale, needs highlighting and makes you wonder whether TCF is anything but an acronym for those acting in this way.
Essentially for some lenders at present – large, mainstream operators in a number of cases – self-employed borrowers are not welcome.
They can try to secure a mortgage but the chances of being successful are effectively zero, and this also goes for their existing self-employed borrowers who they are forcing into a corner by this approach.
The assumption behind this is that self-employed borrowers are a far greater risk then those who are employed and are much more likely to default.
That means we have certain lenders operating two separate affordability calculators where the one for self-employed automatically ‘receives’ 15% less loan than they would if they were employed.
This ‘more chance of defaulting’ assumption is of course held without providing any data or information to back it up; the irony being of course that employed borrowers who, especially at this time, might be considered an even greater risk are waved through without seemingly a second thought.
For instance, we operate in an area where there are many people employed by airlines, but it’s as true if you work in hospitality or certain retail sectors.
Despite there being a real risk that these jobs are – in the Government’s words – ‘not viable’, by dint of being employed they get special dispensation.
As long as you’re not on furlough, and you have three months’ payslips, they will be happy to lend. It’s a very different situation if you’re a self-employed individual working in a much more stable sector.
At the heart of this of course is the approach to a self-employed individual’s income, the comparison certain lenders are making, the timescales they are considering that comparison over, and the often bizarre omittances of income, particularly in relation to overtime, or commission, or bonuses which even if it is clearly regular and often, still won’t be taken into account by some.
Obviously, COVID-19 and lockdown is playing a part here, however – even with everything that is going on at the moment – it is perhaps worth reminding some lenders that lockdown took place during the second half of March/April/and half of May, not during the first three months of 2020, or indeed during the past three months.
If the last three bank statements are reviewed and they don’t tally with the first three months of the year, then the client’s income gets a haircut. If you took off four weeks as a result of lockdown then your income will get cut by the lender by 33%, which is four months not four weeks.
It’s ludicrous, even more so when most self-employed borrowers will have made their 2019/20 tax returns and where lenders could make a very easy comparison over a relevant timescale and take into account all the income brought home by the individual.
What we are essentially toying with here is a situation where self-employed borrowers could be encouraged to be dishonest. Were you affected by the lockdown period?
Answer yes and we’ll cut your income by up to a third, even if you have not seen any ill-effects of lockdown for the last six months. Answer no and we’ll progress your case.
Such an approach is scandalous at any time, but it’s even more so when you’re coming to the same conclusions for existing borrowers who are trying to downsize, cutting their debt and LTV, and are still placed in such a position.
The term ‘mortgage prisoners’ is undoubtedly relevant here and lenders might have some hard questions to answer in the future.
What’s really happening here is that lenders who operate a two-tier approach are relegating self-employed borrowers to the status of second-class citizens.
It needs to be highlighted and it needs to stop; the battering of the self-employed has gone on long enough.