Alan Cleary - Managing Director of Precise Mortgages
Earlier this year the government revealed plans to introduce policy nudges to support retirement saving among the self-employed. According to the government’s own figures1, just 14 per cent of the UK's near-5million self-employed workers were saving into a pension in 2016/17 - a dramatic fall from the 30 per cent doing so in 2007/08.
It’s an interesting move, and one that makes a lot of sense in the context of recent years’ moves towards auto-enrolment into workplace pensions for those in PAYE employment. It is also encouraging to see the government adjust its approach to reflect the changing environment.
The rapid growth of self-employment has been a pronounced feature of the UK labour market in recent years. According to the Office for National Statistics2, the number of self-employed workers rose from 3.3 million people (12 per cent of the labour force) in 2001 to 4.8 million (15.1 per cent of the labour force) in 2017.
Yet, on the ONS’ own admission, there is very little robust data and analysis of the income patterns among the self-employed. What data there is, from the Labour Force Survey3, indicates that the increase in self-employment over this period has been driven by those who work on their own, with a partner but no employees. This group now accounts for 4 million workers in 2016 compared with 2.4 million in 2001.
Meanwhile, data from the Family Resources Survey4 shows that self-employment earnings are volatile - unsurprisingly. This survey looked at weekly earnings and also found that, on average, self-employed incomes were lower than employed incomes at around £240 a week compared to £400 a week.
For mortgage brokers dealing with self-employed borrowers, these dynamics are par for the course. To pay yourself most tax-efficiently often results in taking a minimum salary income and maximising the amount you take out of the business in dividends. More often than not self-employed earners will also leave significant capital in the business, deliberately so as to minimise gains and tax payable.
But the flipside to this strategy is that it hurts affordability assessments considerably. On paper, which is where it matters, self-employed borrowers cannot afford higher mortgage payments. And yet, as many lenders and most brokers know, this is often not the reality.
It can be enormously frustrating for both borrowers in this situation and for their brokers. Common sense should always prevail in the mortgage assessment process, but we all know that sometimes applications get stuck in the system, particularly at larger and more mainstream lenders where this type of specialist business isn’t really what they’re focused on. We have a pricing war in the mainstream market at a time when base rate has risen because the pool of potential borrowers that fit the more vanilla PAYE profile is not getting any larger.
But this is why niche lenders have chosen to focus on serving these types of borrowers. We have the capacity to underwrite cases on an individual basis if needed and we don’t have blanket terms that prohibit the newly self-employed from taking a mortgage from us. We’re not alone in this approach, many of the smaller building societies have also chosen to make manual underwriting a competitive advantage.
Interestingly in the mortgage market, private companies and providers have been quicker to step up and adjust to the shifting structural makeup of our workforce in the UK than have some other sectors, witness the need for policymakers to get involved in how self-employed pensions could be delivered to encourage take up.
One of the great advantages of self-employment is flexibility. It is the power to choose how you work, who you work for and when you work. The downside is that this often means lumpy income and unpredictable financial needs and constraints.
One of the big barriers to saving into a pension for the self-employed, identified in the government-commissioned Taylor Review5, has been the penalties imposed on them should they need to take their money out before retirement. But easy access to savings is paramount to good financial planning for the self-employed, precisely because of the inherent volatility in the structure of their earnings.
It is a conundrum that also exists for lenders when assessing affordability for the self-employed. The nature of flexible working and therefore changeable income makes it harder to justify lending decisions, particularly where affordability looks stretched or income histories are not as long as they might be.
At Precise Mortgages, we are already doing our bit to support lending to the self-employed. But it is interesting to see the Government start to look at how this contingent of society might be better helped by financial services. Watch this space.