Santander’s new mortgage terms are a shoo-in for covid-hit contractors, right? Wrong

Just as this latest third lockdown was starting to lift, it was probably reassuring to contractors reaching last month for a usually reliable newspaper to read that Santander is becoming ‘self-employed-friendly’ with home loans.

It’s all far from usual

Well, it was definitely surprising to us because again, usually, the Spanish bank is at best lukewarm to contractors wanting to get their hands on the lender’s mortgages. 

Unfortunately for ContractorUK readers, we can reveal that despite all the appearances to the contrary, the times which all of us are in must still be far from usual.

Not only is this because the adverse impact of coronavirus on the mortgage market for self-employed people is lingering (yes still). But it’s also because drilling down into the story behind The Times headline of April 18th reveals quite a different picture, in terms of the terms Banco Santander has been offering to contractor mortgage-hopefuls when brokers like us try to put new business its way, writes John Yerou, CEO of Freelancer Financials.

Off to the High Street for a mortgage? Prepare to jump through hoops; lots of them

If you’re a self-employed contractor or freelancer, you’re still more likely to have your mortgage application declined if you just walk in, out of the blue, to the local branch of almost all lenders. If not declined, at least your loan offer amount will be reduced.

It’s true the government is helping applicants and first-time buyers with the Stamp Duty Holiday extension and a new 95% mortgage offering. Yet, even with these considerable boosters, self-employed workers still can’t access the support that PAYE employees can.

But there are lenders who are taking a more proactive and common-sense approach towards the self-employed. This includes freelancers and contractors, even if these workers are (temporarily) moving to PAYE themselves!

Self-employed mortgage applications now that covid restrictions are easing: the latest

Since going into lockdown mode because of the government’s response to the pandemic, lenders have restricted how much all self-employed people can borrow. Reduced ‘multipliers’ and more documentation. It’s not been easy.

In addition, generally lenders have (and continue to) increase the ‘due diligence’ they undertake before issuing a mortgage offer. Put another way, lending criteria has got more complex. This has led to long delays due to the rigorous underwriting process and checks.

As one mortgage broker explained to us: “Banks have been asking self-employed applicants to complete questionnaires before applying so they can make an initial risk assessment.”

Even cases that pass this stage get referred to manual underwriting, which often takes longer to approve. Plus, in a blow to contractors, lenders seem less likely to rely entirely on limited company accounts from the past two or three years to assess affordability. Many lenders are, despite what the headlines say, also reviewing turnover in the last three or six months. So in the main, lenders do want to see any significant income changes since coronavirus lockdown restrictions kicked in.

But what about that great news from Santander?

According to reports last month, Santander announced that it will disregard accounts for the 2020/21 financial year where borrowers have been adversely impacted by the pandemic.

In particular and as mentioned at the outset, The Times said Santander was updating the way it assesses residential self-employed applicants whose business has taken a hit because of covid-19. In a nutshell, Santander’s position was stated to be that, “Instead of using the latest years account 2020/2021, it will use the 2018/19 and 2019/20 accounts.”

But there was even more. Santander was also said to be happy to deduct self-employed applicants’ liabilities relating to government-provided covid-19 income support programmes from their turnover. For instance, it was said, they’d accommodate debts from Bounce Back Loans or the Coronavirus Business Interruption Loan Scheme.

So how’s this unprecedented medley of mortgage sweeteners for coronavirus-hit contractors and self-employed panning out?

We say ‘unprecedented’ intentionally. While it’s become the definitive buzzword of this pandemic, in this context I use it knowing that Santander in the past has not always been receptive to contractors. So we were wary of the claims about the lender’s terms and have been on the case ever since.

The Santander mortgage terms we can evidence

The reality if you’re a contractor going forward to the Spanish multinational for a mortgage has been quite different to the reporting. Before putting pen to paper for this article, we spoke to countless other brokers to see if they shared our experience. Unfortunately for contractors eyeing a mortgage, they did.

In fact, Santander is still asking mortgage brokers to call their staff before submitting applications from borrowers affected by any of the previously mentioned criteria -- decreased multipliers, copious documents or personal finance-related questionnaires.

Furthermore, despite the ‘good news for self-employed’ headline in The Times last month, Santander still wants its underwriters to assess each applicant on a case-by-case basis.

What we’ve learned about Santander’s self-employed mortgage offering

Here’s more of what we’ve learnt over the past week about Santander’s offerings and after those facts, we’ve put our take in italics:

1. The maximum loan-to-value for all self-employed clients is 75%.

• So, self-employed borrowers need a comparatively steep minimum deposit or equity of 25%.

2. The lender wants to see the latest 3-6 months personal and business bank statements to monitor your business outgoings and turnover.

• For most contractors and freelancers, those documents will show at least some covid-related impact.

3. The lender has kept rigorous underwriting criteria and checks in place.

• So, not perhaps the automatic ‘green-light’ reportedly hinted at if you run your own business and want a home loan.

4. Most self-employed applications to Santander, specifically where the applicant has been adversely impacted by the pandemic, get declined.

• This is perhaps the most damning fact of them all, and a particular kick in the teeth if you had read the April 18th article. One broker told us his rejection rate for such applicants is now standing at a whopping 90%!

For its part, Santander is saying the changes to its lending criteria are only temporary and are the result of the complexity of self-employed applications.

Just some context however -- only a couple of months ago, the lender restricted self-employed applicants to 60% LTV mortgage deals (i.e. borrowers would need a 40% deposit). Positively, this has now been increased to 75% LTV, but we believe it’ still too low -- especially by comparison (see below).

How banks since coronavirus have changed their self-employed lending rules

Self-employed borrowers have always had to jump through more hoops than conventional borrowers to get a mortgage. Coronavirus lockdowns have only heightened and highlighted these struggles facing some of our most industrious workers.

The pandemic has caused two major issues for banks, building societies and other financial institutions operating as mortgage lenders. They have:

1. Needed to reduce their own risk at a time of economic uncertainty, and;

2. Struggled to keep up with demand from applicants and queries from existing customers.

This combination (plus other factors) has led to some lenders limiting their mortgage deals. As usual, self-employed borrowers are among those worst-affected. Some of the other lending restrictions in place with lenders (other than Santander) are as follows:

Halifax

Self-employed borrowing is limited to 4.49 times annual income.

In the past, the lender has offered 5 times annualised contract income.

HSBC

The ‘we’re part of something far, far bigger’ bank declined applications from self-employed applicants during the last lockdown. Now, they’re inviting all self-employed applicants to apply “in-person,” either over the “phone or via a Zoom video appointment.”

Nationwide

Self-employed applicants can borrow up to 85% LTV (i.e. you’ll need a 15% deposit). But contractors using their gross contract income are limited to 2 times annual income.

Personally, I find the Nationwide’s policy here absolutely ridiculous.

However we also believe that it’s unlikely that Nationwide will reverse its attitude towards contractors until the end of this year (at the earliest).

NatWest

If a self-employed applicant has had a Self-Employment Income Support Scheme (SEISS) grant, the proceeds will not be considered as income.

TSB

Self-employed applicants can borrow up to 75% LTV.

The borrowing is limited to 4.25 times annual income.

The contractor mortgage market is not just one big sharp end

As even the most casual reader of this article will realise, navigating the mortgage market can be a challenge, especially if you’re self-employed or freelance contracting!

But there are a handful of genuine contractor mortgage specialists who can find solutions for contractors, freelancers and other individuals who work on a temporary, independent basis or for themselves.

Not convinced? Well, take heart because many contractor-friendly lenders are willing to lend up to 90% to 95% of the property value – right now. Helpfully for some contractors, they will also use 46 weeks of annualised contract turnover for affordability.

That said, most contractors will need a specialist broker to ‘package’ their application so that underwriters understand the contractor-applicant’s income, and thus their risk as a lender. As we hinted at in this article’s introduction, looks can be deceiving in these still unusual times so the shrewd will take extra steps to ensure everything stacks up -- even under a rigorous scratch beneath the surface.