New research from Trussle has revealed that it’s potentially easier for the self-employed to become landlords with a buy-to-let (BTL) mortgage, than buy a house of their own.
The online mortgage broker has identified an access gap where the self-employed struggle more than those in “traditional” employment to get residential mortgage applications approved by lenders.
When it comes to buying their own home, Trussle found that self-employed customers represent 23% of all “specialist cases”. Nearly one in seven (14%) self-employed borrowers are less likely to get their mortgage approved than any other ‘under-served’ group. In fact, approval rates for retirees (86%) and those with bad credit (89%) eclipse those for the self-employed (76%).
Why is it so hard to get a residential mortgage?
One of the biggest issues is that there is no standardisation between lenders when it comes to self-employed application criteria; then there is the degree to which their employment history is scrutinised.
The self-employed must prove up to three years of work, while their permanently employed counterparts need only provide their job contract. This means those in self-employment for less than this period could be rejected outright.
Passing the mortgage affordability assessments is also a more complicated process. Self-employed applications require the average of the last two years’ income, compared to the previous three months of income for permanently employed applicants – as well as financial commitments and outgoings.
Unsurprisingly, according to Trussle, nearly half of self-employed people (44%) believe the mortgage system is unfair.
Is buy-to-let really an option?
While lenders still require self-employed borrowers to jump through hoops to secure a residential mortgage, the criteria for approving buy-to-let mortgages has been relaxed. It’s now possible to apply for a buy-to-let mortgage as a self-employed person without three years’ worth of accounts, which means it’s easier than ever for the self-employed to invest in a rental property.
If you are self-employed and interested in a BTL mortgage, then talking to a broker is recommended. You’ll have access to the same products as everyone else and will need a deposit worth at least 25% of the property’s’ value.
Like with any loan application, a good credit score will help, as will financial accounts from previous tax years if you have them. If you are an inexperienced or first-time landlord, you can increase your chances of getting a competitive deal by having three years of accounts, but certain lenders will consider you without them.
Even if you don’t have a high income, existing property portfolio, and three years’ accounts or more, you can improve your chances of getting accepted for a BTL mortgage by:
- Choosing a suitable property; that is one lenders will consider easy to sell, and one which you will be able to rent at a 125% profit.
- Borrow less; it’s easier to be approved for a low loan-to-value mortgage.
- Reduce your outgoings; make yourself a safe loan bet for the lender.
- Improve your credit score; make timely repayments, avoid opening new financial products before applying for a mortgage, and use a credit-builder credit card if you need a boost.
- Work with a professional mortgage adviser; they are best placed to find the lender that best suits your circumstances.
A first step on the property ladder
There is, of course, no guarantee that as a self-employed person, you will get a buy-to-let mortgage. However, if you have a deposit but lack the earnings evidence needed for residential mortgage lenders, BTL could be an opportunity to get on the property ladder until such a time that you can provide three years’ accounts to buy a home of your own.
Currently, there are 4.85 million self-employed workers in the UK and it’s estimated this number will rise to 5.5 million by 2022. As the Trussle research found, they are also one of the biggest under-served groups in the mortgage market, and as people’s working lives become more diverse, flexible and complex mortgage lenders need to catch up. Since Trussle’s inception in 2015 to date, it has seen 54% more mortgage applications from the self-employed, compared to any other group.
Miles Robinson, head of mortgages at Trussle, commented: “The government encourages entrepreneurship, but the mortgage industry is not keeping pace with how fast the self-employed sector is expanding.”
“This group is being let down time and time again with a challenging and confusing mortgage journey, which is resulting in less mortgages being approved by lenders.
“Enough is enough. The industry must work collaboratively to update its requirements and close this ‘mortgage access gap’ to support the self-employed. We’re using our own data to design flexible products for specific under-served groups, like the self-employed. This will be a significant step in our commitment to making mortgages fairer for all.”
