Why is it harder to get a mortgage when you are self-employed?

Those of us who remember shops such as Debenhams, Dixons, and Topshop (to name but a few!) will no doubt agree that the British high street is constantly changing. We’re seeing evermore coffee shops pop-up and, in addition to the disappearance of big brands like Wilko, there are noticeably fewer bank branches in today’s town centres too. This is even being parodied by establishments such as Nationwide:

So, why is this? One of the main reasons is that, in this digital age, we are increasingly choosing to carry out our shopping and banking online. But despite this change, the high street banks’ criteria for approving a mortgage for the self-employed hasn’t really moved with the times – so much so that ninety per cent of New Wave’s clients have already been told “no” by another broker by the time they come to us.

In fact, statistics released in November 2023 by The Mortgage Lender (TML) showed that 34% of self-employed individuals have never even applied for a mortgage. This is because they assume that, as a self-employed individual, they would be rejected.

And further research by TML calculated that nearly a quarter (23 per cent) of self-employed individuals have had their mortgage application denied in the past compared to just 12 per cent of employed workers. It also reported self-employed (SE) individuals are twice as likely to be rejected for a mortgage compared to their PAYE counterparts.

As David Hamblett, founder of New Wave, observes: “A lot of the banks have closed their high street branches and yet they’re still trying operate like they’re a traditional high street bank.”

David argues that self-employed people – who may be in a position to take on either extra work or extra money out of the pot – are often better-equipped to deal with increases in the cost of living. But they often get rejected by the banks because they generally don’t have a PAYE monthly salary like traditional employees.

New Wave is passionate about helping the self-employed – whom the traditional “high street” banks generally treat differently to PAYE employees – when it comes to securing a mortgage.

David explains: “The entire high street only offers mortgages for self-employed people that are based on the average of their customer’s last two years of income. So, the vast majority of clients coming to us that have been declined have been so because their average income just wasn’t enough to get the level of borrowing that they’re looking for.”

The great news is that New Wave works with specialist lenders, including TML, that are able to work with a customer’s most recent year’s income. “If this has jumped up, we will go with this latest year’s amount – and that is often what allows our customers to borrow the sum they require,” explains David.

David also points out that the amount that a self-employed individual, such as a director of a limited company, has saved up in the bank is often irrelevant to many high street banks.

He explains: “What they want to see is how much money you’ve withdrawn from your business. So, if for example you’ve made £10m in profit but you’ve only paid yourself £10k the bank will give you a £50k loan (five times your salary).”

“At New Wave, however, we can secure you a mortgage that’s based on your company’s (most recent year’s profits) rather than the amount of cash you’ve taken out of the business.”

Happily, New Wave successfully secures 97% of its mortgages for its self-employed customers.

David concludes: “We understand your situation better than anyone else. Whether you’re a sole trader, a company director, or a contractor, we are here to help you – the self-employed – secure a mortgage.”

Traditional banks use outdated criteria: They rely on averages and pay little attention to recent income growth, even when significant.

Rejection rates are high: 34% of self-employed individuals avoid applying for a mortgage due to expected rejection, and rejection rates are nearly double compared to employed individuals. Brokers like New Wave specialise in securing mortgages for the self-employed, boasting a 97% success rate.

Your profits are not taken into account: Traditional banks often ignore company profits, limiting your borrowing potential despite financial stability.

Traditional banks do not offer specialist solutions: Specialist mortgage brokers like New Wave can secure you a mortgage that’s based on your company’s profits rather than how much money you’ve taken out of the business.

Remember, being self-employed doesn’t have to hinder your homeownership dreams. Explore alternative lenders and partner with knowledgeable brokers, such as New Wave, to unlock the mortgage you deserve.