16th February 2015

Milk and Honey

Most Governments of the recent past have tried to paint the UK as the land of milk and honey when it comes to being ‘business friendly’. Certainly, the current Coalition, mostly driven by the Conservative Party it has to be said, has placed a lot of eggs in the business basket over the past five years. Smaller to medium-sized firms have been a key ‘demographic’ and there have been a number of initiatives and tax-friendly incentives dished out particularly in recent years in order to cosy up to this part of the electorate. 

Of course, the facts of the matter are that these entrepreneurs, the self-starters, the self-employed, the freelancers and contractors, have all grown in number over the past five to seven years. It will not take a genius to work out that the catalyst for this was the Credit Crunch and subsequent recession which left many people out of work, choosing there and then to go it alone and set up their own business. More by necessity than design might we say.

The numbers do not lie when we want to view how the UK working market has shifted, especially with regards to the self-employed. Last year’s ONS data revealed that 4.6 million people in the UK are now self-employed which is the highest number at any point over the past 40 years and is 15% of the entire workforce. This figure grew significantly from 2008 – indeed there was a 732,000 increase in the number of people who were self-employed; an increase of 2% since that year. Overall, any rise in employment the ONS said, was predominantly down to the rise in the self-employed and the number of women becoming self-employed is increasing at a faster rate than the number of men. 

All this makes for interesting reading and when set against the context of the mortgage market is somewhat ironic because the fact is that, the ability of the self-employed – especially the newly self-employed – to secure mortgage finance was incredibly difficult between 2008 and 2014. At a time when the number of self-employed was growing, the lending community was far less inclined to give them the mortgage finance they needed. 

Why was that? Well, again we can return to the all-encompassing Credit Crunch and perhaps most notably the proliferation of self-certification mortgages before it. These were designed to allow people like freelancers, contractors, those on variable incomes dependent on bonuses, etc, to self-certify their income and to secure the mortgage they needed. Unfortunately, lenders soon began accepting self-certification for anyone, not just the self-employed, so you had a situation where everyone was gaming the system and nurses on salaries of £20k pa were being encouraged to take out mortgages based on their self-certified salaries of £60pa. Even if these were completely unaffordable going forward.

With the Credit Crunch came the understanding that there were many millions of borrowers on these types of loans who shouldn’t have been. The result was, to a certain extent, the regulator throwing the self-certification baby out with the mortgage bath water and these products as we had previously known them were soon no more. 

Which of course didn’t help the many more people who were now going down the self-employed/contractor route and those, who already had these mortgages and were need to remortgage. So we had a situation for many years, up until last year, where the self-employed were finding it incredibly difficult to secure a mortgage. 

However, thankfully there has been a recent degree of movement certainly aided by the specialist lenders, and some of the high-street giants, towards a much more accepting view of self-employed borrowers. The newly self-employed in particularly will now find a mortgage market environment which is at least open to them whereas before it was a closed shop unless you had three years’ accounts to show. Now, and again this has only been a very recent move, some lenders such as Precise Mortgages, Kensington and even Halifax will work on the basis of one year’s accounts. Similarly, for contractor workers we are seeing criteria begin to shift, if not perhaps loosen entirely, with some lenders willing to look beyond a two-year history and instead take into account previous work in a similar field.

These are not huge shifts in criteria but for those who have been somewhat starved of any mortgage hope they will feel like big steps in the right direction. The fact is that lenders are waking up to the new working world. 4.6 million people – of which huge numbers will be credit-worthy borrowers – is a big pool of people and if they can square their underwriting with their lending appetite then there is business to be completed and margin to be achieved. 

So, while we might say that the mortgage market for the self-employed is not exactly at normal levels it has certainly bounced off the bottom with some energy since the middle of last year. Challenger banks and specialist lenders who marry up manual underwriting with technology are most likely to lead the way in this area however let’s not rule out more of the larger lenders adopting a more focused individual underwriting approach when it comes to the self-employed. This would certainly go a long way to providing a more fertile market rather than the barren patch which was around for such a long time.

Mortgages