Recent findings from TML suggest a startling trend: more than one-third of self-employed individuals have never attempted to apply for a mortgage, primarily due to the fear of rejection. This apprehension is not unfounded—30% believe that their employment status would automatically disqualify them, while 26% are informed of the heightened difficulties that self-employed individuals face in securing mortgages.
Financial Preparedness: A Barrier to Entry
Financial readiness is another substantial hurdle. A significant 36% of self-employed people are still in the process of accumulating their deposit, indicating that immediate property investment is not a viable option for them yet. Moreover, 17% are playing the waiting game, hoping for a dip in interest rates to make future mortgage payments more manageable. The mortgage application process can appear daunting to about 10%, deterring them from taking the first step.
The Challenge of Documentation
A self-employed person’s business maturity plays a critical role in mortgage applications. Fifteen percent of potential applicants are deterred because their businesses are less than two years old, lacking the requisite financial history to demonstrate income stability. This points to a pressing need to understand how specialist lenders operate, offering alternative avenues for those with unconventional income patterns.
Success and Failure: The Self-Employed Experience
Despite the perceived barriers, 57% of self-employed applicants have eventually secured a mortgage. However, success isn’t always immediate—15% of this group faced rejection initially. A smaller fraction, 4%, have yet to taste success in their mortgage endeavors.
Reasons for Rejection: Understanding Lender Concerns
For those who have faced mortgage rejections, the reasons are often tied to income stability. Volatile income is the leading cause (38%), followed by lenders’ calculations that applicants would struggle with repayments (28%). Insufficient documentation to prove income (27%), a history of missed or late payments (11%), and credit issues like defaults or CCJs (11%) are also significant factors. Surprisingly, a small percentage (5%) were denied for not being registered on the electoral roll.
The Stricter Lens on Self-Employed Applicants
Self-employed individuals often undergo more rigorous affordability assessments than their employed counterparts due to the nature of their income—irregular and complex—which brands them as higher-risk to lenders. This risk aversion translates into stricter lending criteria, making the mortgage process seem insurmountable for some.
Expert Insights: Adapting to a Growing Workforce Trend
Steve Griffiths, COO at TML, highlights a disconnect between the growing trend of self-employment and traditional lenders’ ability to accommodate complex income situations. This gap in the lending market is significant, deterring self-employed workers from applying, even when they may be excellent candidates for mortgages.
The Role of Specialist Lenders
Griffiths advocates for the role of specialist lenders like TML, which offer flexibility and expertise in handling intricate financial profiles. These lenders are pioneering methods to assess income differently, such as accepting one year of accounts instead of the standard two, thereby facilitating the self-employed in their pursuit of homeownership.