Study Finds Self-Employed Have Lowest Mortgage Approval Rates In The UK

• Compared to other under-served factions of society, self-employed applicants have the lowest approval rates in the mortgage industry.
• Lack of employment history and insufficient accommodation of factors specific to the self-employed have been identified as core reasons for this gap.
• Self-employed applicants have suggested a more focused financial test for the evaluation of mortgage applications being filed by self-employed individuals.

A research review has revealed that borrowers who are self-employed are finding it more difficult to get approval for a mortgage application compared to those who are employed in more conventional jobs. The study has been conducted by Trussle, a mortgage broker, and has concluded that this has created an access gap for self-employed individuals in the mortgage market.

According to details reported in the review, 23% of all the cases that fall under the specialist category of mortgage applicants are self-employed. Trussle has disclosed that out of all the cases it has received from under-served segments of society, self-employed individuals file 54% more applications for a mortgage compared with any other group. This trend has persisted at the brokerage since its inception back in 2015, to date.

Other groups categorized under the under-served category include first-time homebuyers, retired individuals, and those with a low-income or bad credit score.

Even though the number of applications being filed by self-employed applicants is much higher compared to other under-served groups, their approval rate is much lower, currently at just 76%. In comparison, around 89% of applicants with a bad credit score get approved, while 85% of applications with high loan-to-value ratio get accepted as well. For first-time buyers, the approval rate stands at a comfortable 90%, while 86% of applications coming from retired applicants get approved too.

These statistics, as per the report, indicate that the mortgage industry views self-employed applicants as a higher risk compared to these groups.

Self-employment is certainly more volatile compared to permanent employment at a firm. Returns are dependent on business performance, which is connected with the economy and government rules and regulations. This year, the report states, many self-employed individuals are less confident in their ability to sustain business performance, due to expected changes in the IR35 as well as the slow state of the British economy. However, 25% are still hopeful that their business would perform well this year.

According to the analysis conducted by Trussle, a major reason why the self-employed face greater mortgage application rejection rates compared to the employed is that lenders have employment history as an eligibility criterion. In most cases, applicants that are employed only need to submit their employment contract and this condition is fulfilled, while self-employed individuals must prove at least three years of work experience in the past to qualify for a loan.

Also, the income eligibility requirement considers only the past three months of income history for employed applicants, while self-employed applicants must provide at least two years of income history for scrutiny, including a record of expenses and other financial obligations.

Self-employed applicants have provided recommendations into making the mortgage approval system fairer. According to 28% of self-employed respondents, lenders should base approval decisions based on future earnings forecasts for applicants who are self-employed. Also, around 26% stated that lenders needed to develop a more specific test to evaluate self-employed applicants.