Richard Tugwell, intermediary relationship director at specialist lender Together, discusses access to the second charge market for self-employed workers

There’s been much talk in recent years about fostering Britain’s ‘entrepreneurial spirit’ as we look to the future post-Brexit. A recent survey by the Institute of Directors (IoD) found a whopping 83% of entrepreneurs say they are very or quite optimistic about their businesses prospects over the next 12 months, underlining this continued entrepreneurial trend in the UK. Meanwhile, the march of the self- employed continues unabated, with the most recent official figures revealing that there were 4.8 million workers in this category last year. However, despite these figures, this market remains underserved with mainstream lenders’ criteria often making it more difficult for self-employed and contract workers to secure finance. This has led to calls for greater flexibility to ensure that their self-employed criteria reflect a shift in working trends.
For example, most high street banks will ask for three years of accounts whereas lenders like Together will consider newly self-employed borrowers, with a 12-month minimum trading history, accepting an accountant’s certificate, SA302s or tax calculations submitted to HMRC as proof of income.
Together also recognises that people’s circumstances are not always ‘standard’ when it comes to arranging a second charge loan, so will look at different purchase types, such as right-to-buy and shared ownership. Self-employed borrowers with a less than perfect credit history or someone wanting to borrow against an unusual property type will also be considered.
Specialist lenders such as Together also look more favourably on contract workers applying for loans, if they can demonstrate a solid and stable working history, even if they have taken up different contracts or moved into different sectors, or have multiple sources of income.
Together considers applications from self-employed people in all these situations on a case-by-case basis, using bespoke underwriting, rather than automated credit scoring.
Each borrowing request is assessed on affordability and Together doesn’t require a minimum amount of income or set a loan-to-income ratio. They will generally be assessed on the most recent year’s net income and, in some cases, on projected income.
Self-employed borrowers may also want to access a second charge loan to repair their credit history, and there are a number of specialist lenders who will be able to provide finance for this purpose. Those who trade through limited companies may be able to take out a loan, secured against their home to expand their business or their buy-to-let portfolios, or to consolidate their debts.
This may not be the best option for everyone, so it is worth taking advice, but second charge loans have proved useful for borrowers who may have an incomplete credit history, perhaps because they have just launched their own business, and who may have been turned down by a mainstream finance provider.
Borrowers also take second charges as an alternative to a remortgages, if they don’t want to sacrifice their current, favourable rate of interest, or want to avoid exit fees or changes to the terms and conditions of their existing mortgage. They can be used for all kinds of purposes, including growing a business, debt consolidation, paying a deposit for a son or daughter’s new home, or improvements to their own home.
The growing popularity of second charge loans as an option has been highlighted by the latest figures from the Finance and Leasing Association (FLA), which show a 9% hike in new business volumes in the year to November 2017. In total, 21,288 new second charge loan agreements were arranged over this period and the value of loans also increased with new second charge applications worth £996m – a 13% rise on the previous 12 months.
It could be a big year for second charge loans, as this upward trend continues. There will be more opportunities for specialist lenders, brokers and their customers as mainstream providers continue to tighten their criteria, locking many self-employed people out of the market.
At Together, we’re confident that our flexible, common sense approach will mean we’ll be able to meet the borrowing needs of even more hard-working people who fall into this category.