Giving up on the dream: Is the UK mortgage market killing self-employment?

Research from Aldermore reveals the extent to which self-employed first-time buyers struggle to get on the property ladder. Mortgage specialists offer their insights on the situation to indicate whether the dream of self-employment – for some – needs to be put on hold

Becoming a homeowner is a significant milestone, but for those who are self-employed, the path to securing a mortgage can be fraught with challenges no matter your stage in life.

A staggering 40% of self-employed first-time buyers admitted to abandoning their businesses to secure a mortgage. This drastic measure highlights the difficulties faced by those with non-traditional income streams when trying to meet lenders’ criteria.

The research also found that self-employed individuals are twice as likely to be rejected for a mortgage compared to those in traditional employment and end up paying for rent and a mortgage before contracts are exchanged.

But are young first-time buyers the only ones affected? If more people in later life and post-divorce continue to turn to freelancing and mortgage lending simultaneously, this could be a bigger problem.

There was a 13% increase in Q1 2024 of 56-65 year-olds searching for their first property compared to the same period last year, according to Legal & General Mortgage Services which is involved in 1 in 3 mortgages in the UK.

This figure suggests a growing number of buyers are having to wait until their late 50s and beyond but are still keen to take their first step onto the housing ladder. Add self-employment to the mix and do they have a chance of securing a mortgage?

The Freelance Informer reached out to mortgage specialists to find out:

• Whether the mortgage market is biased against self-employed people, potentially discouraging self-employment.
• What changes are needed to make lenders more confident in lending to self-employed applicants
• If lenders prefer certain types of self-employed workers (i.e., those in umbrella companies) over others (i.e., sole traders or limited company directors), and why
• How the upcoming UK budget might affect how lenders assess self-employed mortgage applications

The mortgage barrier

Nearly one in five prospective buyers who were denied a mortgage cited self-employment, irregular income, or contract work as the reason, according to Aldermore. This points to a systemic issue within the mortgage industry, where lenders often struggle to assess the financial stability of those outside conventional employment models.

When 40% of first-time buyers are ditching their entrepreneurial dreams just to secure a mortgage, we know something’s seriously amiss in the lending world.

Dariusz Karpowicz, Director at Albion Financial Advice

The cost of overlapping rent and mortgage payments

Adding to the financial strain, nearly half of first-time buyers found themselves paying both rent and mortgage simultaneously due to difficulties aligning the end of their tenancy with the completion of their purchase. This overlap, averaging 2.4 months, can cost buyers over £5,000, placing further pressure on their finances.

Jon Cooper, director of mortgages at Aldermore, advises first-time buyers to maintain open communication with their landlords throughout the buying process to explore options for aligning tenancy agreements with purchase dates.

A call for flexibility

Cooper stresses the need for lenders to be more adaptable in their approach to mortgage applications. He says, “Entrepreneurship is key to our economy, and we shouldn’t penalise borrowers on this basis.”

He also highlights the importance of “human underwriting,” which allows lenders to gain a deeper understanding of an applicant’s financial situation, enabling them to make informed decisions.

“When 40% of first-time buyers are ditching their entrepreneurial dreams just to secure a mortgage, we know something’s seriously amiss in the lending world,” says Dariusz Karpowicz, Director at Albion Financial Advice.

Karpowicz says the challenge has always been particularly acute for self-employed individuals, especially those with high business costs and variable incomes.

“Lenders’ strict affordability criteria, combined with the way self-employed income is assessed for tax purposes, often results in significantly reduced borrowing capacity,” he says.

Many simply go back to being self-employed after the mortgage is complete. That’s applying under false pretences or mortgage fraud, and if caught would land them in way more trouble than they realise. If caught and accused of that, then you wouldn’t even get terms from Klarna for your next pizza delivery.

Simon Bridgland, Director at Release Freedom

Bait and switch worker status could get you in trouble

Karpowicz points out a concerning trend. “Temporarily switching to employment status to secure a mortgage, then reverting to self-employment post-completion, treads dangerous waters,” he warns.

“This practice could indeed be viewed as mortgage fraud – obtaining a loan under false pretences. It’s a risky strategy that could have serious legal and financial consequences, regardless of how tempting it might seem,” says Karpowicz.

Simon Bridgland, Director at Release Freedom says some first-time buyers are “blissfully unaware” of the potential fall-out from such moves. “If they make the move to employee for genuine reasons, such as stability, having enough work, regular pay and conditions then great,” says Bridgland. “However, how many simply go back to being self-employed after the mortgage is complete. That’s applying under false pretences or mortgage fraud, and if caught would land them in way more trouble than they realise. If caught and accused of that, then you wouldn’t even get terms from Klarna for your next pizza delivery.”

Some mortgage specialists, such as Stephen Perkins, Managing Director at Yellow Brick Mortgages believe there is still hope in getting a mortgage when you’re self-employed. However, he has witnessed some people throw in the towel on owning their own business and prioritise home ownership instead:

Whilst there are mortgage lenders who can lend after a first year of trading, setting up a business is a brutal and challenging process that often takes three or more years to get fully established with a reliable income. This doesn’t always correlate with house ownership plans and for many, part way through those early years will be tempted back to the safe and reliable PAYE path, which also simplifies and often boosts affordability within the mortgage application process.

Adam Stiles, Managing Director at Helix Financial Partners sees the challenges self-employed mortgage candidates going through as “very sad.”

Stiles says, “Self-employment should be celebrated and not penalised. Anyone thinking or considering switching from self-employed to employed purely to secure a mortgage should always seek professional advice as there are a number of ways to approach self-employed income and many lenders view it differently,” he says.

People can be very animated about how clever their accountant is in reducing their income to lower the tax bill but are then surprised when they struggle to get the mortgage they want or need.

Scott Taylor-Barr, Principal Adviser at Barnsdale Financial Management

Not all lenders are the same (nor are applicants)

“The difference in the amount someone can borrow between lenders and how they view income is staggering,” says Stiles.

The managing director says switching from self-employed to employed shouldn’t be a “knee-jerk reaction to some cautionary tale someone has heard second-hand.”

He says there is plenty of help available to assess what is achievable.

He thinks more can be done to ease the application process. “We as advisers and lenders alike need to help educate more in this area. Self-employment shouldn’t be an obstacle to getting a mortgage,” he says.

Scott Taylor-Barr, Principal Adviser at Barnsdale Financial Management believes there is no reason why mortgage lending should be the issue for someone to not follow their dream of self-employment.

However, where he does find people coming “unstuck” is when they think that “cash in hand” jobs don’t need to be declared to HMRC but can then somehow “be taken into account” when it comes to a mortgage application.

“People can be very animated about how clever their accountant is in reducing their income to lower the tax bill but are then surprised when they struggle to get the mortgage they want or need,” he says.

However, he admits lenders haven’t been as open and useful for the self-employed as they are now since the days of self-cert mortgages.

He explains: “We have lenders happy to lend with just one year of trading, some will look at projections, others have specific rules for sub-contractors, or those contractors working via limited companies, or third-party umbrella companies. Some lenders will look at a director’s salary and dividend income, others will look at their salary and the business’s net profit.”

Ross Lacey is more upbeat about the self-employed getting mortgages approved.

Lacey, a Director and Chartered Financial Planner at Fairview Financial Management, specialises in working with self-employed and company directors and says, “Overall, we don’t see it being a significant barrier to getting a mortgage.”

But that comes with a big ‘but’: “Generally lenders will want to see a couple of years of consistent income which is different to someone employed under PAYE who may only need to have a contract of employment,” says Lacey.

“After this time has passed though, in our experience lenders are as open to lending to self-employed as they are employed. It’s just important to understand their criteria and what they are looking for, particularly for limited company directors where some lenders will still only factor in what has actually been drawn from the business in dividends and salary, rather than their share of the net profit,” explains Lacey.

Being self-employed and seeking a mortgage is like playing Snakes and Ladders blindfolded – just when you think you’re climbing up, you might slide right back down! The fact that 40% of entrepreneurs are ditching their dreams for a mortgage is simply staggering.

Dariusz Karpowicz, Director at Albion Financial Advice

Are lenders discriminating against the self-employed?

Not all temp workers and contractors will have as hard a time getting a mortgage. For example, Darryl Dhoffer, Managing Director at The Mortgage Geezer says it’s no surprise that lenders view PAYE umbrella company contractors as having predictable and stable income.

That said, he believes lenders must adapt to the changing workforce trends.

“Lenders do need to adopt more flexible underwriting criteria and tap into a growing market of self-employed borrowers,” says Dhoffer. “If the government introduces measures to support self-employed individuals, such as tax breaks or improved access to finance, lenders you would hope, may be more willing to offer more mortgage options – that said if taxes increase, then we can only see lenders apply the brakes for self-employed borrowers.”

Karpowicz agrees change is needed. “Being self-employed and seeking a mortgage is like playing Snakes and Ladders blindfolded – just when you think you’re climbing up, you might slide right back down! The fact that 40% of entrepreneurs are ditching their dreams for a mortgage is simply staggering.”

He says the issue isn’t really about lenders discriminating against the self-employed; it’s more about the “challenge of assessing variable incomes in a system designed for predictable PAYE earnings.”

“While umbrella company contractors might get an easier ride due to their PAYE-like income structure, limited company directors often face tougher scrutiny despite potentially being more financially stable,” he says.

Next steps

Karpowicz continues, “Looking ahead, what we really need isn’t just tweaks to the current system, but a complete rethink of how we assess self-employed income. The upcoming budget might not revolutionise things overnight, but there’s definitely room for innovation in how lenders evaluate self-employed applicants.”