Santander Self-Employed Mortgage Gives Applicants Hope of Mortgage Lending
Written on 4 May 2021
For many people, the last 12 months have been a year they would like to put behind them. The cost to individuals, families and the economy has been immense. Now that the vaccination programme is yielding the kind of results we all hoped for we can start to look to the future. We have reported before that the self-employed have always faced a tougher application process for mortgages than their employed counterparts, so it is particularly discouraging that it appears the next 3 years could be their hardest yet. This comes as a direct result of the pandemic. Help, however, has come from a fairly unexpected corner in the shape of new self-employed mortgage criteria from Santander.
What Is the Self-Employed Mortgage Process Normally?
As a self-employed person you would be expected to submit evidence of earnings from the most recent 2 years for affordability purposes. That involves collating SA302s/tax calculations and tax overviews covering the most recent 2 tax years. From autumn this year those years will be 2019/20 and 2020/21, within which the entire pandemic year sits as it effectively started from 23rd March 2020 and is still continuing now.
Underwriters will then assess those figures and will usually take an average of the 2 years net profit and use that for the affordability calculations to arrive at a maximum loan size (or salary plus dividends for directors).
Underwriters will also look for trends in those figures and if there is a noticeable drop in income they will have to consider whether it is a failing business and if they should potentially decline the application or only use the most recent, lower set of figures as the basis for the affordability calculation.
How Will Affordability Be Affected?
The effect on affordability for self-employed applicants whose business suffered as a result of the pandemic could be extreme.
Here’s an example:
- In normal times, if a business showed a net profit of £45,000 in each of the 2 most recent years then the maximum a lender is likely to be able to go to is 5x income: £225,000
- A pandemic-hit set of accounts could easily show the most recent year’s net profit at £27,000 or even lower
- With a reduction like that, underwriters would likely be forced to use the lower figure for affordability and using the same 5x income would yield a maximum loan size of only £135,000 – a huge reduction in borrowing capacity of £90,000
- This could be worse in reality as not many lenders would be able to consider an income multiple of 5x at that level of income
What’s So Special About the Santander Self-Employed Mortgage?
Santander are one of the biggest lenders in the UK with an impressive range of products and they have been popular with both consumers and brokers for many years. They have looked at this process and foreseen the problems coming. They have made a very progressive decision to potentially ignore the 2020/21 set of figures and base their affordability calculation on the previous 2 years’ figures (2018/19 and 2019/20) for their self-employed mortgages.
The ability to do this rests on 2 extra requirements:
- First, Santander will ask for and then deduct any future Covid-19 related liabilities/commitments - e.g. government assistance that has to be repaid or deferred tax liabilities
- Second, like most lenders nowadays, they will assess the most recent 3 months of business bank statements to see how the business is fairing financially at the time of application
Ignoring the “blip” year means the self-employed could access levels of borrowing almost as if it never happened. Being able to do this with a high street lender is terrific news as that gives access to some of the best products and interest rates out there.
Will Other Lenders Follow Suit?
We sincerely hope that they will. Although Santander currently limit the maximum LTV (loan-to-value) to 75% - so no 95% lending to self-employed workers unfortunately - this is one of the most forward-thinking approaches we have ever seen. As one of the country’s leading mortgage intermediaries we applaud Santander’s progressive stance and fervently hope – and wait for? - other lenders to follow suit.