The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

With mortgage rates fluctuating and Moneyfacts reporting a mere 15-day average lifespan for mortgage products in June - the shortest since March - quick responses in the market have become essential.

For self-employed individuals, securing a mortgage is even more daunting due to their unpredictable income streams. This underscores the need for lenders to adopt agile, dynamic pricing strategies to better accommodate these borrowers’ unique financial situations.

Challenges faced by self-employer borrowers

Historically, self-employed applicants have struggled more than their traditionally employed counterparts to secure mortgage approval. A 2022 study by The Mortgage Lender revealed that self-employed borrowers were twice as likely to face rejection compared to those with regular employment. This disparity highlights a challenging outlook for the self-employed borrower.

The primary hurdle is the stability and predictability of income. Recent economic volatility, even influenced by factors such as weather conditions, has further complicated this. For example, the ONS reported that GDP growth stalled in April due to adverse weather affecting consumer spending. This unpredictability is particularly problematic for self-employed individuals whose businesses rely on fluctuating footfall, making it challenging for lenders to assess repayment capacity accurately.

Additionally, self-employed applicants often face more rigorous documentation requirements. Unlike employed borrowers, who typically provide just three months' worth of payslips, the self-employed must furnish two or more years of company trading accounts to prove their income.

With approximately 4.25 million self-employed individuals in the UK, it's essential to explore strategies that improve their access to mortgages.

The role of dynamic pricing and tailored scorecards

When evaluating mortgage applications, lenders must quickly assess risk, liability and affordability—a process made even more complex for self-employed borrowers. Traditional pricing models may not fully account for the nuances of these borrowers’ financial circumstances, exposing lenders to risks, and leading to potential financial losses and dissatisfaction among applicants.

Dynamic pricing engines offer a promising solution. By leveraging instant analysis of multiple factors, these engines enable lenders to make informed decisions on loan pricing, eligibility and risk assessment. This approach helps mitigate risk and tailor offerings to the unique circumstances of self-employed applicants.

Dynamic and risk-based pricing is not a novel concept; it has been effectively applied in equity release and portfolio landlord lending. By considering individual circumstances and property risks, these models allow for more personalised and competitive loan terms.

For mortgages, risk-based pricing engines offer a distinct advantage by creating accurate client scorecards. These scorecards take into account various borrower characteristics, enabling a more comprehensive assessment that goes beyond mere income. As a result, self-employed borrowers gain access to more personalised and fair mortgage rates, enhancing their inclusion in the lending process.

Benefits and challenges for lenders

Dynamic pricing and tailored scorecards provide mutual benefits for both lenders and borrowers. These scorecards adjust rates based on individual circumstances, reflecting the true risk and potential profitability of each loan.

Although there are concerns that personalised pricing might reduce profit margins, this is not necessarily the case. Dynamic pricing can lead to increased application volumes through automation, reduced delinquency rates by accurately predicting repayment capabilities, and the flexibility to adapt to shifts in borrower behaviour and market conditions.

Moreover, dynamic pricing models enable lenders to maintain an "always-on" pricing approach, to continuously adjust rates based on real-time market data. This ensures they can provide appropriate rates while optimising the balance between risk and return. Brokers also benefit from this approach, as dynamic pricing helps protect clients and streamline the mortgage application process.

Despite these advantages, the widespread adoption of dynamic pricing technologies in residential mortgages may be gradual due to legacy systems. However, newer lenders are increasingly utilising advanced data sources, such as open banking and income verification services, to overcome these obstacles. This shift is paving the way for more balanced and data-driven pricing strategies that better accommodate self-employed borrowers.

Incorporating dynamic pricing engines could allow lenders to enhance operational efficiency, manage risks more precisely, and ultimately offer personalised mortgage pricing. This technological advancement could not only improve service for self-employed individuals, but also boost overall customer satisfaction in a highly competitive and rapidly evolving market.